The CMBS markets have seen a tremendous amount of interest this year, mainly on the heels of corporate market concerns that soured many investors. Upon quick reflection, the investment grade curve has seen tremendous flattening due to the sharp demand in triple-B credits -thank you CDO participants- to the tune of 20 basis points, the narrowest spread in the last four-plus years.

As that was being exploited, up-in-credit recommendations were rampant as well, leaving triple-As now exhausted and fairly valued. The latest value squeeze that has fallen victim to over-interest is the IO sector. Once notably cheap, especially on the weekly trimming of supply projections, IOs are now near their historical tights.

Estimates for how much IO classes have tightened range from 120 to 140 basis points. This has brought in a wave of profit taking through the prolific volumes of weekly bid lists but with hardly any damage to spreads. Dealers have been the primary buyer of those lists, leaving many skeptical over what the true market measure of IO classes are with investors. With the recent pricing of the JPMC/CIBC, some answers may have been garnered. The main IO class came 10 basis points wider than secondary market levels, disappointing many on the Street.

Still, many analysts believe that there is some room for further improvement, or at least no reason to worry about a major concession. So long as investors are still interested in yield, which they are, and supply remains at it's tepid pace, spreads appear safe at current levels. At worst they will slip a few basis points wider.

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