The CMBS market paralleled broader markets last week with buyers preparing for quarter end. The spreads were roughly unchanged week-over-week as trading volume slowed, according to Bank of America Merrill Lynch analysts.
Analysts saw the slowdown as technically driven and anticipate that spreads will rally as the market moves through the second quarter of the year.
However, spread tightening is likely to be limited versus the moves seen year-to-date. They think that new-issue last cashflow triple-As can tighten an added 15 basis points to 20 basis points, and double-As and single-As might experience an added 25 basis points-50 basis points of spread tightening.
The wider-spread legacy last cashflow A4s and AMs should stay well-bid considering the backup in rates, the corresponding increase in yield offered by these bonds and their shorter duration, which can mitigate the negative effects if interest rates rise.
On the other hand, analysts believe that the demand for CMBS bonds that are lower in the legacy capital structure, specifically for later-vintage, lower-quality AJ bonds, will stay limited in the medium-term until real estate markets manifest further signs of improvement and some of the uncertainty related to potential troubled loan workouts is resolved.