November 19, 2017 – Volatility returned after a long absence in both the equity and fixed income markets as investors fretted about a wide range of issues including uncertainty around U.S. tax reform, cracks in the high yield bond market and a flattening yield curve.  The S&P 500 Index fell 0.53% on November 15, its first daily drop of more than 0.5% in 50 trading sessions.  High yield bonds traded lower five consecutive days beginning November 9th as weak corporate earnings releases from High Yield issuers in addition to concerns mentioned above had investors rethinking their risk appetites.  The U.S. Treasury yield curve continued to flatten. Yield on the 2-year Treasury has been rising in line with expectations for further Fed rate hikes, while the 10-year Treasury yield has held relatively steady for the past several weeks around 2.35%.  The yield spread between the two shrunk to 70 basis points midweek, a 10-year low.  Historically, flattening yield curves have been harbingers for recessions.  Finally, consumer inflation once again registered another benign performance.  The Consumer Price Index (CPI) edged up by just 0.1% in October. Over the prior 12 months, headline CPI has risen 2.0% while “core” inflation, which excludes food and energy costs, rose 0.2% in October and 1.8% versus a year ago.  

Activity in the Alternative Lending markets remained robust.  SoFi announced that it priced its largest consumer loan deal and 11th securitization of 2017. SCLP 2017-6 was a $727 million issuance, making it the largest offering of securities backed by consumer loans. Investor acceptance continues to grow as measured by broadening participation, declining subordination levels, and upgrades on seasoned deals.  SoFi reported that 5 new institutions joined the offering bringing total participation to 39.  Marlette completed its fourth securitization pricing $312 million of securities.  The deal was significantly oversubscribed allowing Marlette to price the deal at the tightest spreads ever (Class A priced at L+75 down from L+100 in MFT 2017-2 which priced in June).  Kroll Bond Rating Agency (KBRA) assigned preliminary ratings to three classes of notes to be issued by Upstart Securitization Trust 2017-2 (“UPST 2017-2”). It is a $175.059 million consumer loan ABS transaction that is expected to close on November 21, 2017. Kabbage secured a new $200 million revolving credit facility from Credit Suisse this week bring total debt funding to $750 million.  

Opinions expressed within the commentary are general opinions of Chris Lalli  and are not opinions of CapAccel or SF Sentry Securities, Inc. Nothing in this commentary should be viewed as solicitation to buy or sell specific securities or a recommendation to participate in any transactions. Securities offered through SF Sentry Securities, Inc., member FINRA/SIPC.

Sources:  TIAA-CREF, Wall Street Journal, PeeriQ