With little going on in the CMBS markets of late, the focus has been clearly targeted on the supply line heading ito the last third of 2001 as well as some light profit taking in the meantime. So far, the last four months are shaping up to be rather busy, if all the posted deals come to market. What has been especially noted of the global calendar is the number of non-conduit issues, totaling $11.20 billion, combined with a nearly equal $11.25 billion of more traditional conduit securitizations. Salomon Smith Barney points out that the planned conduit issuance is slightly more than what was seen over the same period last year, but that the "other" issuance is the real volume driver.
This brings up some potential opportunities, says SSB. Single-asset issues in the latter half of the year will not carry any "trophy" properties, and will likely price wider than previous deals. With lesser known names as collateral, however, rating agencies are likely to provide extra scrutiny and provide better credit protection, adding a further benefit to holding this paper. Lastly, the majority of the issues are floating-rate notes, which should attract good demand since floating-rate conduit issuance has been low this year.
So what does all of this mean for spreads? Through the end of the July supply deluge, through the spotty August calendar, and now into a market lull, spreads have held firm. The 10-year triple-A spread stands at 44 basis points over swaps, equivalent to 129 basis points over Treasuries, flat from the end of July. Thank the dearth of supply and light dealer inventories for keeping spreads tight over the month. And, as Roger Lehman of Merrill Lynch notes, CMBS provided a level of negative convexity protection that investors were not getting in the RMBS sector. CMBS are now rich to residential mortgages and agency debentures, says Lehman, but remain wide versus some ABS and corporate bond sectors.
Salomon is also cautious about selling the sector, despite the six basis point gain CMBS has had on agency debentures, but recommends short-term investors lock in some profits. For the longer-term Salomon cites positive technical factors (steady supply as spreads remain firm), convexity benefits in a rally, and the carry as reasons to stick with the sector. CMBS has a Libor spread advantage of 48 basis points over 10-year agencies, allowing for an eight basis point concession in triple-As relative to debentures, to still break even on the trade. Lower spread volatility in the remainder of the year plays into the positive picture as well.