Despite the dormant issuance calendar and expected holiday-induced slowdown in activity, the CMBS market was subject to brisk investor selling toward the end of August. Spreads had been at the tight end of recent ranges and with a lull before the next supply wave, profit-taking surfaced and clean-up of inventories by way of bid lists was seen. In total some $1.2 billion of bid lists of investors hit the Street, most of which comprised of long-dated, triple-A-rated paper.

Despite the two-basis-point back- up in CMBS spreads, the sector is still viewed as rich with continued selling expected. Aside from better relative value being offered by agency debentures and residential pass-throughs, selling pressure is coming off of the convexity trades in swaps. If Treasurys continue to rally, RMBS investors will put on convexity receiving trades in the swaps market, drawing those spreads tighter and making CMBS tighter to Treasurys, prompting some sell trades, says Merrill Lynch's Roger Lehman. The only bright spot is that a continuing rally in the Treasury curve will likely have CMBS outperforming RMBS as the latter market is more exposed to call risk with lower yields.

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