Just a few days into the second quarter, the CMBS pipeline has apparently hit the front burner. There is $10 billion in fixed-rate issuance currently planned for the quarter, and the way things are shaping up, it looks like it may all get done. This week alone, as many as four deals - totaling over $4 billion - are in the queue.

Spreads are a bit cheaper coming off of a record quarter of issuance that saw over $15 billion in conduit deals. The triple-A 10-year WAL current trade is at 29 basis points over swaps, one wider than JPMC 2004-CIBC8. During the previous week, more than $1.3 billion in triple-A was out for bid across a couple of lists, making room for the next wave of paper.

Still, despite facing such a strong month of supply, spreads have held firm at impressive levels. Even as Freddie Mac is criticized for being such a significant buyer, spread concession should be modest if buying continues, and would suggest that tighter spread levels will be maintained through the summer.

On a statistical basis, three-month triple-A rated CMBS spread Z-scores are fairly valued to swaps and are slightly rich to six-month (-0.82) and 12-month (-1.3) measures. Z-scores are currently the richest versus current coupon 30-year Fannie Mae paper (-1.78 3-month Z-score) as that sector has cheapened on an increase in supply and higher refinancing activity.

Within the sector, the CMBS credit curve has flattened 12 basis points since the start of the year. Strong CDO demand has been responsible for the move as has the short dealer inventories in that credit slice, says Roger Lehman, managing director of mortgage research at Merrill Lynch, who is "unconcerned about the effect of the heavy new issue pipeline on the triple-B sector." Merrill's Lehman added that as long as rates stay low and structured finance CDOs continue ramping at the current pace, the triple-B sector should remain firm. These bonds provide good carry compared to the rest of the investment-grade CMBS market. Currently, triple-B spreads are as tight as they have ever been, trading at 77 basis points to swaps, 23 basis points narrower than their 12-month average.

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