• Borrowers need to understand exactly what product they are getting from a bank before LIBOR goes away at the end of 2021.
• Explains Thirty Capital Analyst Jay Saunders: “Understand what your lender is proposing. Pay a lot of attention to what your fallback index is . . . what your index will be once LIBOR goes away, because it will go away at the end of the year.”
• Currently, there are a number of competing indexes for LIBOR. Lenders need to understand what the indices are, and what each one represents.
• “Try to get a grasp on that pretty early in the process and know what your options might be. I think a lot of people talk about this like there is room to negotiate that with your lenders,” Jay cautions.
• Chances are, there won’t be room for negotiation. A bank will pick an index and go with it.
• Hedging entities need to determine whether they can hedge the index. If they can hedge it, what kind of liquidity will they have in the market for those hedges?
• Jay acknowledges that there are lenders who don’t like SOFR because they believe it does not represent their true cost to fund loans. He thinks such lenders will likely acquiesce around a SOFR alternative—most likely Bloomberg’s BSBY index.

• Banks are starting to originate SOFR-based products, and are also trying to scope out what’s happening in other banks.
• Jay believes some new products are adding more confusion and noise to the market.
• “Last week we had yet another entrance into the short term rate market. IHS Markit came out with a credit-sensitive, LIBOR-like index,” he explained. “They call it a CRITR. They also published a credit-sensitive add-on that they say can be tacked on top of SOFR to create something that looks like LIBOR.”

• The two big indicators influencing much of the economy at the moment are inflation and employment.
• But both have been impacted heavily by the pandemic, and so there are no easy solutions - or predictions.
• Thirty Capital Analyst Bryan Kern says: “I don't think inflation is going to be a focus for the Fed until these supply chains are fully restored. This may not be until the fourth quarter of this year, maybe even the first quarter of next year.”

• Friday, June 4 saw a tremendous rally in Treasuries, indicating the fixed income market is buying into the Fed being much more focused on employment numbers right now, rather than inflation, explains Jay.
• Employment is improving slowly, and the economy is anticipating around 650,000 new jobs. But the unemployment rate came in slightly lower, at about 5.8%.

• This focus on employment and inflation is keeping the trading band tight, with a range of between 1.55 and 1.62. At most, the band range is 20 basis points, between 1.55 and 1.75.
• Observes Bryan: “I don't really see anything on the horizon that’s going to make things break lower. It looks like all pressures to the upside. It’s just when does it happen?”

• Thirty Capital CEO Rob Finlay says there is a lot of demand for CMBS right now. “There's a couple deals that are being priced this week. And the market CMBS spreads have widened slightly across the curve.
• “Freddie and Fanny has actually tightened a little bit. But asking spreads for CMBS products are basically flat where they were.
• “There are some opportunities for borrowers to get some pretty good, all-in lower coupons,” notes Rob.

However, Bryan notes that last week also saw the 10-year Treasury drop by about 10 basis points, probably pointing to the fact that the Federal Reserve isn’t planning on responding to increasing inflation anytime soon. This is partly due to the fact that no other major economy has attractive yields. So fixed income investors took advantage of a spike up to about 1.72% on the ten year. Bryan predicts that investors and consumers can expect minimal volatility or rate changes in the near future.

Thirty Capital’s CEO Rob Finlay points out that the big commercial market alert last week led to many consumers selecting floating rates instead of fixed rates on loans, even though fixed rate is currently inexpensive. A two-per-cent 10 year Treasury rate is possible by the end of the year.

However, Rob notes that in spite of the bright economic outlook, the picture for commercial real estate is uncertain. He doesn’t foresee workers returning to officers anytime this year, so there’ll be no increasing footprint in commercial real estate.

Explains Rob: “People still aren't paying their mortgages and people still aren't getting kicked out of apartments. The real estate market is really going to be very fragile. So I think, quite frankly, people are liking floating rate loans because they can really get dinged hard on a fixed-rate loan.”

Going forward, the economy is expected to experience massive growth in 2020, with predictions for GDP at around seven percent in Q1, ten percent in Q2, and well over five percent for the remainder of the year.

Analyst Jay Saunders points to historic trends, especially the period right after the Great Recession. “Everyone's trying to figure out the Fed at the moment. That's clearly the only game in town - who's buying bonds. They're going to let the rates run for a long time for the foreseeable future.”

Analyst Jason Kelley sees rates moving a little bit higher, but not taking off. I don’t see the old days of three and fours. There is going to be some pressure to move up with the short-term inflation. But I think we're going to hit a plateau once we get there.”

The team analyses and shares their views on:
• What actions the Feds may take on rates in 2021
• The likely potential for low floating rates for a long time to come
• Whether borrowers should be looking for floating-rate deals
• What kind of rate deals may appeal to borrows seeking a longer-term loan
• The potential for most consumers to select floating rates over fixed in the foreseeable future.
• Despite the lack of volatility, market conditions will be very interesting for some time to come.