Commercial mortgage bonds have performed well following the Federal Reserve’s mid-December announcement that it will taper its purchases of assets this year, according to research published Friday by J.P. Morgan.
However, the analysts expect spreads could widen modestly in the coming weeks as the new issue market picks up.
Benchmark legacy A4s have tightened 5 basis points over the past three weeks, to swaps plus 168 basis points.
New issue spreads have also tightened with a break in the issuance calendar; benchmark 10-year new issue AAA spreads are 8 basis points tighter at swaps plus 87 basis points, while AA, single-A, and BBB- spreads are 8 basis points, 10 basis points, and 15 basis points tighter, respectively, at swaps plus 160, swaps plus 215, and swaps plus 365.
“The relative stability of financial markets around the tapering announcement has allayed one of our primary macroeconomic concerns going into 2014,” analysts said in the report. “Limited spread volatility in response to tapering means that the market is more effectively differentiating tapering from tightening.”
Despite modest spread tightening, however, new-issue AAAs have significantly underperformed comparable duration corporate bonds since mid-November. And new-issue CMBS will not necessarily catch up to the rally in corporate bonds; instead J.P Morgan expects new issue spreads to continue to underperform modestly through mid-year.
That’s because, while CMBS spreads could tighten in early January amidst the temporary lull in supply, analysts at JP Morgan believe that, longer term, a less supportive supply/demand imbalance can push new issue spreads modestly wider.
Private label CMBS supply reached $80.4 billion in 2013, including approximately $53 billion conduit and $24 billion in deals backed by a single borrower. Though no deals are currently in the market, the analysts expect activity will pick up again quickly in January.