CMBS Spreads Rally Post ML III

Legacy last-cash-flow CMBS spreads rallied following the Federal Reserve’s Maiden Lane III auction on Thursday last week to finish the week unchanged on average, according to a report released today from FTN Financial.This happened after spreads widened by about ten basis points earlier in the week.Last Thursday the Federal Reserve Bank of New York held an auction and sold the entirety of the MAX CDO holdings from its ML III portfolio to Barclays Capital and Deutsche Bank Securities. For the full story on the bidding process, please click here.With senior-subordinate or “AJ” tranches comprising almost half of the CDOs' underlying assets, the market's ability to absorb the roughly $7.9 billion in CMBS without considerable market disruption was "an impressive show of strength for the sector in general," according to FTN.The firm's daily regression showed that legacy CMBS spreads are close to two standard deviations cheap at current levels with an R-Square of 89%. This analysis predicts legacy CMBS spreads by using measures that track the ABX and Standard & Poor's REIT indices as well as the spread on 'A'-rated financials.At current levels, FTN's analysis showed the last-cash-flow legacy CMBS to be 50 basis points “cheap” on average.