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​HFF Research Update for February 16, 2016: Facet Joint Syndrome

Tuesday, February 16, 2016

Weekly insights on current research in the commercial real estate industry from HFF Managing Director of Research Jimmy Hinton. View Daily Rates on the HFF website or access the HFF Daily Rates App in iTunes.

Facet joints in the spine work to guide and limit movement. Their movement relative to one another is essential to the upper body’s ability to twist and bend at the same time. When one facet joint becomes degenerated, dislocated, fractured or otherwise impeded by cartilage, it can effect significant pain or, in the case of substantial damage, prevent the upper body from normal motion entirely. Facet joint syndrome is therefore a decent analogy for the global economy; when one joint falls out of line, it can adversely impact the entire spinal column.

Analysis of Market Insights and Economic Performance

Capital Flows in China

China is in the news this morning, as it always seems to be. We have discussed China’s falling foreign currency reserves for a few months now and, as we suggested was possible, those funds dropped to a four-year low last month. The country’s government also is stepping up fiscal stimulus through infrastructure spending and monetary stimulus vis-à-vis lower loan provision ratio requirements for banks. Each is aimed at increasing capital flows to participants of the underlying economy.

Speaking of capital flows, the Financial Times had a terrific bit on the subject late last week. According to the Washington D.C.-based Institute for International Finance, Chinese corporations and citizens expatriated some $113 billion USD in January alone, proving the evasive ingenuity of the Chinese to new controls set in place. January was thus the 22nd consecutive month of capital outflows from China. The New York Times also printed an intriguing story on Smurfing - the practice of individuals pooling together $50,000 at a time to send massive amounts of capital abroad. The New York Times’ estimates of capital outflows are more sizable, per the graph below.

Capital Flow China

But the tide may be turning in China. After the People’s Bank of China cut interest rates six times, aggregate financing surged in January to 3.42 trillion yuan ($525 billion USD), approximately 50 percent higher than economists’ forecasts. Availability of credit can soothe investor angst, but rising debt outstandings can as well. Fortunately, companies appear to be paying down foreign debt at the same time, which is particularly important given the weakening yuan relative to the USD.

On the above news and a disappointing outcome from a meeting between Russian and Saudi Arabian oil ministers, the U.S. Treasury market is selling off only slightly, with the yield on the 10-year currently at 1.77 percent.

Rates memos will be intermittent for the rest of the week. Keep your eye on corporate bond spreads. The spread between the 10-year UST and a blend of the 10-year AAA and 10-year BBB is out 33 bps since December 29.

Economic Spreads

About Jimmy Hinton

HFF Jimmy HintonMr. Hinton serves as Managing Director of Research for HFF and is responsible for the firm’s research efforts. Mr. Hinton works with the executive management team to assist in investor relations and to inform both HFF staff and firm clients with in-depth analysis of economic, property and capital market trends. He is also responsible for providing extensive market reports, client presentations and deal-specific analysis for debt placement and investment sales assignments. Mr. Hinton’s responsibilities include substantial interaction with pension funds, life insurance companies, regional and CMBS lenders, REITs, foreign investors and private equity funds.

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