Agency Finance Market Update - Q4 2021
2021 ended much as it began, as equity markets continued their relatively steady march upwards to end the year at all-time highs. Rates whipsawed throughout the fourth quarter after a mostly dull summer, as markets digested news and sentiments regarding FOMC action in 2022. The 10-year U.S. treasury yield ended the year just north of 1.50%; however, since the end of the year it peaked around 1.90%, topping the highest point in 2021.
Though there is no complete consensus regarding the exact timing and number of rate hikes this year, the Fed is widely expected to raise rates in the coming months and is well into the planned slowdown of its bond buying program. Markets are currently betting that the first rate hike will occur in March, though this is subject to change.
Agency CMBS spreads inched wider after Thanksgiving, largely driven by supply and demand dynamics and rate movement, but tightened to start the year due to two factors: first, buyers re-entered the market, and second, rates sold off substantially. They have since widened as secondary market selling spiked in late January. October and November saw the largest monthly origination since January 2021, as stable agency spreads and the specter of rising rates presented strong financing incentives. Origination decelerated in December, in part due to the usual holiday slowdown.
The agencies begin the year with new objectives instructed by the Federal Housing Finance Authority (FHFA); among other changes, the agencies’ lending caps increased by $8B (11%) each compared to 2021, and both agencies are now required to reserve at least 25% of business to be affordable to residents at or below 60% of area median income (AMI), up from 20% in 2021.
To offer some context on current spreads: for a Tier 2 (1.25x/75%), 10-year fixed-rate deal around $10-$25mm in size and with average mission characteristics, we are seeing all-in rates around 3.70%-4.10%, depending on deal specifics. For similar floating-rate deals, we are seeing all-in rates around 2.50%-2.75%, also depending on deal specifics.
Ginnie Mae spreads were generally unchanged at the end of the year compared to the beginning of Q4, though all-in rates rose as treasury yields increased. Exclusive of MIP, 223f loans are currently trading around 2.70% while 221d4 loans are trading around 3.30%.