Opinion is split over what the future holds for CMBS spreads, but the long and short of it is that 50 basis points over swaps for triple-A tranches looks to be about the cap. Spreads are currently at 47 basis points on new, par-priced paper, but there is some speculation that a late-quarter deluge of supply will hamper any hopes of spread tightening.
Domestic supply looks to be about another $15 billion in the next two months, adding to the over $40 billion already seen this year. That is what happened last year and is a solid bet for this year as well. It would seem, however, that suggestion is at least partially mitigated by the overall financial and economic picture.
Asset-backed paper is seeing increased ratings pressure, mortgages are about as sensitive to daily rate swings as they can get, and corporate paper remains the bane of many a portfolio. Until the economy perks up, the CMBS sector is still the go-to arena.
The concerns lie with the following - delinquencies have risen this year (admittedly were slightly lower last month), spreads are at historically narrow levels, and terrorism insurance is still a question mark. That said, however, delinquencies are still at historically low levels, spreads have remained comfortably in a narrow trading level for months, and terrorism insurance is at least getting more attention in Washington with talk that a bill may be available for President Bush when Congress reconvenes in November.
Add in the fact that prices have come off a bit, and you get a pretty compelling sector to buy right now. As well, the economy is (hopefully) bottoming out, so any turnaround now can only benefit the commercial real estate sector going forward.
Within CMBS, there is little substitute for high-grade paper. Prices have cheapened a bit and spreads, if softer, will attract portfolios looking for a safer, higher-yielding environment.
The most recent pricing of Wachovia Securities's $875 million 2002-C2 transaction late last week was the third conduit of the month. The issue saw the triple-A 10-year tranche come in line with the prior two at 47 basis points. But as was alluded to with the bias for better credits, the single-A rated tranche priced at 75 basis points, 4 basis points wider than the CSFB issue that priced Oct. 17.
There are at least nine other conduits firmly scheduled throughout the remainder of the fourth quarter, totaling over $9 billion of the $15 billion of supply expected through yearend.