Most mortgage market sources reported that it was quiet last week, with investors laying very low despite the fact that brokerage screens were active.

"This indicates to me that dealers are being active with each other, and there is lots of movement of bonds going back and forth, but mostly between dealers rather than from dealers to investors," said one head of a major commercial mortgage-backed securities desk.

"It could be a spread bet for next year, with people buying bonds thinking that with the lack of supply, things will tighten next year. Or, it could be year-end window dressing," he added. "Some dealers have lots of losers on their shelves, and it is nice to clean that up before next year."

A credit tenant lease deal from GMAC also caught the markets attention. "But this [GMAC] deal is a pretty big deal, because a lot of dealers are looking at CTL deals and trading them, and trying to determine how to make money off of them," said the source.

The First Union/Merrill Lynch CMBS conduit (see related story above) that was expected in January will be launched next week, with pricing taking place most likely close to the weekend of Dec. 12. With the Federal Open Market Committee meeting taking place on Dec. 21, most observers mentioned that very few dealers want to price on that date or thereafter.

"It is getting kind of late for issuers, so the First Union deal may very well be the last conduit of the year," said a CMBS trader. "Warburg Dillon Read is supposed to come to market, although if they don't do it in the next week it will probably be held off until 2000."

Among the many floating-rate CMBS deals in the market is a transaction being launched by CDC Capital for $549 million. The underwriters will be Lehman Brothers Inc. and Bear, Stearns & Co. According to one source, this will be CDC's first securitization of their interim loan program.

Application To DOL Gets Attention

The market was also abuzz with talk of the expansion of pension funds' investments to include subordinated bonds (see Observation). Most mortgage researchers are definitely expecting this to happen.

"I actually think that in recent deals, the mezzanine portions went more strongly than the triple-A's," said a CMBS trader. "These last two deals - PNC and Chase Manhattan - the mezzanine piece traded at pretty good levels in comparison to the triple-A's. In fact, the triple-A's were a tougher sell."

"There is no doubt that supply in CMBS will be lower next year, so if we can expand the investor base, it would technically be a good situation, and you can expect those tranches to trade tighter," added another researcher. "It is hard not to be bullish on spreads. But we will be looking into this ERISA-eligible issue very closely to determine who the new buyers are going to be."

On the residential side, collateral has been performing pretty well over the last couple of weeks due to the Treasury trade-off, and there has been a lack of supply in the par coupon. Therefore, there has been a lot more buying in premiums - the curve is beginning to steepen a little bit.

"A lot of dealers are going up in coupon," said Michael Hoeh, head portfolio manager at Dreyfus Corp. "Typically, whenever we've traded off like this, premiums have been prevented from rallying because of mortgage production. Luckily, that hasn't happened this week, so that has helped premiums do better."

Additionally, the long-waited but somewhat anticipated slowdown in Freddie Mac November prepayment rounded out an overall slow week for the mortgage market.

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