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Springing Caps Are Sprung

A couple months ago we sent a blast titled “Springing Caps Are About to Be Sprung” which touched on the concept of springing caps and when to buy. Read it here.

 

At the June Fed meeting, officials hiked rates 0.75% to a range of 1.50%-1.75% and signaled that the July 27th meeting will likely come with another increase of 50bps or 75bps. Powell has gone on to say that the pace of future increases will depend on incoming data and the economic outlook.

 

Markets are buying the aggressive stance and have another 2.00% of increases priced in between now and year end, putting Fed Funds around 3.50% in December. The table below outlines implied rate increases from Fed Funds futures.

Fed Meeting                      Approx. Increase              Implied Fed Funds            

July 27th                                       0.75%                                      2.25%

Sept 21st                                       0.50%                                      2.75%

Nov 2nd                                         0.50%                                      3.25%

Dec 14th                                         0.25%                                      3.50%                  

 

The bottom line…

  • Loans with springing cap provisions up to 1.50% have already been tripped
  • Without “compelling evidence" of inflation cooling, loans with triggers as high as 3.50% could end up being tripped before year end

 

If your loan has a springing cap provision and you’d like to monitor pricing, or discuss potential strategies, please reach out to the team at 704-887-9880 or pensfordteam@pensford.com.