Following a slow start to trading in the commercial mortgage-backed securities sector early last week, CMBS picked up substantially toward the week's end, with an extremely active day of bid lists and very healthy flows.
"Monday was deathly dull, Tuesday we traded $68 million a day of CMBS, which is an above-average day of trading, but Wednesday was dynamite, with a $150 million bid list, a $90 million bid list and a $30 million bid list," said the head of a major CMBS desk. "They were all good names, all conduit deals, tiers one through three, and they were well bid for. We bought some of the bonds but not as many as we would have liked."
"Flows have not merely returned to normal, but by Wednesday, we were clearly seeing a multiple of our normal dealing activity," said another CMBS trader.
Additionally, Treasurys moved higher last week on weak volume because of support ahead of the Treasury's $2 billion buyback. While there was sporadic activity seen throughout the various spread sectors, corporates and CMBS saw the heaviest flows.
Commercial mortgage-backed securities saw three bid lists, for a total of just under $200 million. The lists saw good demand as supply is down, and covers came in at the low end of talk for most of the classes.
For instance, J.P. Morgan Commercial Mortgage 2000-C9 AAA paper was being talked at swaps plus 43 to 45 basis points. Donaldson Lufkin Jenrette Commercial Mortgage 1998 paper saw covers at swaps plus 21.5.
Another factor contributing to the very active bid lists was the reception of last week's Morgan Stanley Life $689 million transaction, which was excellent.
"It was the first conduit deal in a month, and clearly the demand for that transaction may have provoked players to take profits on other conduit transactions," said Michael Youngblood, managing director of real estate at Banc of America Securities. "Rather than just being local to CMBS, this reflected greater confidence that we have seen the wides in spread for all credit risk product, because we saw just as active a week in home-equity paper as we did in CMBS."
Bear Stearns & Co. noted in a recent research report that CMBS issuance is down about one-third over the same period last year. Further, through June there are only eight fixed-rate conduit deals totaling $7 billion and one fusion deal in the amount of $1 billion on the calendar right now.
Additionally, last week Moody's came out with its CMBS First Quarter report, entitled "Conduits Face Mixed Credit Signals." The report contained a prediction that U.S. issuance for 2000 will decline about 20% or more from 1999 levels. Moreover, first quarter global CMBS volume was at $13.2 billion, down nearly 30% from the $18.7 billion registered during first quarter 1999. The global volume drop was characterized by a large drop in U.S. issuance that failed to offset the large increase in international issuance.
Lastly, the report noted a trend to smaller deal sizes and a continued drop in diversification by number of loans.