Tag Archives: Mortgage Bonds

Commercial Loan Demand Plunges To New Post-Lehman Low Even As Lending Standards Ease

(ZeroHedge) Last quarter, amid the bank panic resulting from surging loan loss provisions, we observed that the heart of the debt-addicted US economy was hit especially hard by the double whammy of collapsing consumer loan supply, with the August Senior Loan Officer Survey finding that banks reporting tighter loan conditions had surged to the highest level since the Lehman bankruptcy, while consumer demand for most loan types had tumbled, in some cases to record low levels.

However, in the subsequent three months much has changed, following the latest round of bank earnings which saw a collapse in loan loss provisions across the US banking sector, which miraculously plunged from near all time highs back to pre-covid levels in the span of just a few weeks.

This dramatic turnaround in bank outlooks on future loan losses also had a profound impact on loan issuance standards.

Specifically, the Q3 SLOOS found that lending standards for commercial and industrial (C&I) loans again tightened in 2020 Q3, but improved from the devastation observed in Q2. 38% of banks on net tightened lending standards for large and medium-market firms, which was a nearly 50% improvement from the 71% in the previous quarter, while 31% of banks on net tightened lending standards for small firms vs. 70% on net in the previous quarter.

There was also an improvement in pricing with 13% of banks increasing spreads of loan rates over the cost of funds for large firms vs. 59% last quarter, but a smaller share of banks on net reported tightening terms in Q3 on maximum size of credit lines (7% vs 41% in Q2) and for premiums on riskier loans (29% vs 59% in Q2).

Among the banks that tightened credit standards or terms for C&I loans or credit lines, 26% cited a deterioration in the bank’s capital position as playing a role, 95% cited worsening industry-specific problems, 91% cited a less favorable or more uncertain economic outlook, 69% cited a reduced tolerance for risk, 18% cited decreased liquidity in the secondary market for loans, 11% cited a deterioration in the bank’s own liquidity position, and 9% cited increased concerns about the effects of legislative changes, supervisory actions, or changes in accounting standards.

Other loan types saw a similar improvement, with standards for commercial real estate (CRE) loans also tightening on net in Q3, but at a far smaller net share of banks compared to last quarter. 57% (a 24% improvement) of banks on net reported tightening credit standards for construction and land development loans, 55% (vs 78%) reported tightening standards for loans secured by nonfarm nonresidential properties, and 45% (-19pp) on net reported tightening lending standards for loans secured by multifamily residential properties.

A similar picture was seen in the real estate loan sector, as far fewer banks on net tightened standards for mortgage loans compared to in Q2, a move facilitated by the tremendous inflow of capital to the housing market. Lending standards for GSE-eligible (-43pp to 12%), non-jumbo non-GSE eligible (-45pp to 14%), Qualified Mortgage jumbo (-49pp to 20%), non-Qualified Mortgage jumbo (-51pp to 19%), non-Qualified Mortgage non-jumbo (-44pp to 20%), and subprime (-10pp to 33%) mortgages all tightened.

Completing the supply side, banks’ willingness to make consumer installment loans was basically unchanged after sharp decreases in the previous two quarters; credit standards for approving credit card applications tightened further (27% on net vs. 72% previously), while a modest share of banks also tightened standards for auto loans (14% vs. 55% previously).

However, while supply clearly is thawing, it was the demand side that was troubling, especially in the key – for the US economy – Commercial & Industrial (C&I) loan category, where demand from large-and medium-sized firms, weakened further in Q3 as 35% of banks on net reported weaker demand for C&I loans for large and medium-market firms, compared to 23% on net reporting stronger demand in the previous survey. This was the lowest net demand in this series since the financial crisis.

That said, there were some signs of recovery in other loan classes: demand for CRE loans fell on net across all three categories, but by less than in Q2. And while demand for mortgage loans increased further in Q3, it was credit card loan demand that saw a major reversal, with demand for credit card loans virtually unchanged at 2% on net vs. a collapse of -65% in Q2, while demand for auto loans picked up at a small share of banks (8%) after steep declines the previous two quarters.

In summary, while Americans aggressively took out loans which serve merely to satisfy their own personal consumption needs and prefund that next car or TV purchase, and which merely pull demand from the future,  when it comes to the all important C&I loans which result in capex spending and overall economic growth, here the picture continues to deteriorate despite an easing in loan issuance standards. This simply means that for the vast majority of Americans, the economic environment remains so dismal that demand for C&I loans is now at levels last seen just around the Lehman crisis. And since the consumption-funding loans which are going gangbusters will soon re-freeze following the next round of covid closures, we doubt it will take too long before this translates into a sharp swoon in the broader economy.

Which, as we explained in another post earlier today, is precisely what the Fed needs in order to launch its next QE…

… one where the Fed will end up monetizing all of 2021’s bond issuance.

Source: ZeroHedge


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Are Bonds Headed Back To Extraordinarily Low Rate Regime?

The U.S. 10-Year Treasury Yield has dropped back below the line containing the past decade’s “extraordinarily low-rate” regime.


Among the many significant moves in financial markets last fall in the aftermath of the U.S. presidential election was a spike higher in U.S. bond yields. This spike included a jump in the 10-Year Treasury Yield (TNX) above its post-2007 Down trendline. Now, this was not your ordinary trendline break. Here is the background, as we noted in a post in January when the TNX subsequently tested the breakout point:

“As many observers may know, bond yields topped in 1981 and have been in a secular decline since. And, in fact, they had been in a very well-defined falling channel for 26 years (in blue on the chart below). In 2007, at the onset of the financial crisis, yields entered a new regime.

Spawned by the Fed’s “extraordinarily low-rate” campaign, the secular decline in yields began a steeper descent.  This new channel (shown in red) would lead the TNX to its all-time lows in the 1.30%’s in 2012 and 2016.

The top of this new channel is that post-2007 Down trendline. Thus, recent price action has 10-Year Yields threatening to break out of this post-2007 technical regime. That’s why we consider the level to be so important.”

We bring up this topic again today because, unlike January’s successful hold of the post-2007 “low-rate regime” line, the TNX has dropped back below it in recent days. Here is the long-term chart alluded to above.


And here is a close-up version.


As can be seen on the 2nd chart, the TNX has just broken below several key Fibonacci Retracement levels near the 2.30% level – not to mention the post-2007 Down trendline which currently lies in the same vicinity. Does this meant the extraordinarily low-rate environment is back?

Well, first of all, the Federal Reserve only sets the overnight “Fed Funds” rate – not longer-term bond yields (at least not directly). So this is not the Fed’s direct doing (and besides, they’re in the middle of a rate hiking cycle). Therefore, the official “extraordinarily low-rate” environment that the Fed maintained for the better part of a decade is not coming back – at least not imminently. But how about these longer rates?

Outside of some unmistakable influence resulting from Fed policy, longer-term Treasury Yields are decided by free market forces. Thus, this return to the realm of the TNX’s ultra low-rate regime is market-driven, whatever the reason. Is there a softer underlying economic current than what is generally accepted at the present time? Is the Trump administration pivoting to a more dovish posture than seen in campaign rhetoric? Are the geopolitical risks playing a part in suppressing yields back below the ultra low-rate “line of demarcation”?

Some or all of those explanations may be contributing to the return of the TNX to its ultra low-rate regime. We don’t know and, frankly, we don’t really care. All we care about, as it pertains to bond yields, is being on the right side of their path. And currently, the easier path for yields is to the downside as a result of the break of major support near 2.30%.

Source: ZeroHedge