Barring a dramatic change in the corporate environment, vis-a-vis a firming credit outlook, commercial mortgage spreads look to be in fine shape. There is some concern that the supply outlook, expected to be over $7 billion for both September and October, might threaten current levels. Secondary spreads, however, suggest otherwise. Last week's Bank of America offering came at +47 basis points to swaps for the 10-year triple-As, but quickly tightened to +44 bps in the secondary. Spreads have since settled in at +46 bps.

Aside from the high investment-grade product, there has been increasing interest in junk-like tranches as well. Roger Lehman of Merrill Lynch points out that double-Bs have tightened significantly in recent months, while high-yield corporates have been subject to higher default rates and a resulting spread widening. Merrill likes the seasoned vintages, and 1997/1998 has seen heavy demand.

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