Despite some of the tightest levels in recent memory, CMBS spreads continue to richen, as supply has been notably slower than last year's pace, primarily because of the terrorism insurance issue. A multitude of factors, however, is contributing to the success of the CMBS sector so far this year.
Crossover buying from the corporate sector is sustained with each passing headline about another failed oversight of accounting practices. Those two factors in particular have investors and analysts alike comfortable with the notion that spreads may indeed ratchet even tighter before any concerns of a reversal begin to surface.
Current triple-A 10-year spreads are being quoted at 42 basis points as evidenced both by recent new issues as well as secondary bid lists. Investors lightened up on over $1 billion in inventory last week, threatening spread performance, but dealer desks greedily bid on the lists suggesting that inventories may not be as full as previously thought.
For their part, investors were simply making room for the new paper, not only validating the 42 basis point level seen on the June 20 GMAC conduit 10-year triple-A tranche, but drawing mezz-class paper tighter as well.
The triple-B tranches of the June 26 Lehman Brothers/UBS Warburg conduit printed five basis points through initial talk levels as well as five inside of the MSDW TOP-7 and GMAC conduits that came earlier in the month.
Tightening in triple-B classes has resulted in a three basis point flattening in the AAA/BBB credit curve, which has now settled at 68 basis points. Greenwich Capital notes that the current spread differential is five tighter than the six-month and year-to-date averages and 19 narrower than 2001 averages. Also of note, single-As pricing at 60 basis points are the richest levels in the past four years.
Supply continued to come at a $2 billion or so clip last week with the pricing of two conduits, Lehman/UBS and Merrill Lynch Mortgage Trust. (See scorecards at the back of this issue for more details). This followed a similar total in the week prior and just under $2 billion in the first week of the month. There is little left for June, but there are expectations for another $10 billion in total issuance for the month of July.
Concerned that the supply pipeline will cause a bit of spread concession? No worries, say industry experts. The spread stability, attractive yield, and diversification of the paper will continue to attract buyers, as will the better convexity characteristics of the sector.
According to Lehman, the CMBS sector has prepaid at only a 1.6% CPR over the last year, versus 20.6% CPR for FNMA 6.5% MBS coupons. Looking ahead, spreads in triple-A tranches are expected to grind tighter, with some estimating that the 10-year tenors could dip as low as 30 basis points over Swaps before year-end.
