The fact that the new issue calendar was light in the CMBS market last week only enhanced the already attractive spread levels available to investors. Coming after a supply-heavy July and the effects of FAS 140, spreads battled to tighter levels due to strong pent-up investor demand and an overall interest for well-diversified, high-quality paper. With an expected August slowdown as a backdrop, demand has yet to be sated by both investors and inventory-light dealers. This bodes for stable, if not tighter, spreads over the coming weeks.
In the second quarter, there was over $27 billion in domestic CMBS issuance to hit the Street, most of which was back-ended into July. Over the month, investment-grade issues beat Treasurys by 17 basis points and triple-Bs by 52 basis points, according to Lehman Brothers.
Looking ahead, August looks to put up only $5 billion in new issues (over half of which is already been done) and September is estimated at just under $5 billion, according to estimates by Credit Suisse First Boston.
Last week, a hodgepodge of collateral entertained the market, with pricing spreads spraying an impressive range of concession. As noted by Merrill Lynch, the Simon Mall single-borrower issue via CSFB saw the 10-year triple-As 5 basis points wide of guidance at 70 basis points over comparable swaps. The GMAC World Trade Center single-borrower mezzanine classes were 20 basis points tighter than initial talk. Goldman Sachs' large-loan offering priced the 10-year triple-As at plus 63 basis points versus swaps. The only conduit to price, First Union, got tagged at 47 basis points over the 10-year swaps.
Spreads were trying to creep tighter, with a few indications that plus 43 basis points for triple-A 10s is not out of reach. Last week, a $100 million BWIC for the recently priced GECMC 2001-2, A4 tranche printed at plus 43 basis points, compared to plus 46 basis points on July 31. CSFB is skeptical that those levels will be realized just yet, though with their own conduit CSFB 2001-CP4 currently marketing at 45 to 46 basis points over, would be "thrilled to be proven wrong."
According to Merrill Lynch's Roger Lehman, the prospect for further tightening is boosted by potential crossover buying from the corporate and RMBS sectors. Refinancing and convexity concerns will bring in pass-through buyers if the yield curve continues to rally. Additionally, credit concerns of an economic slowdown would bring in investors looking for higher ratings, more diversification, and better liquidity than corporates at comparable spreads. There is some talk of rising vacancy rates and their impact on the securitized market, but as UBS Warburg notes, any increases in losses can be made up for in enhancement to the deal structures.