The CMBS sector has been quiet of late and is expected to stay this way through the end of August. As such, the market poised for something of a limbo, with contradictory forces keeping spreads in a range.

Essentially, there are good arguments for both tighter and wider levels, but both camps would agree that the recent 42 to 50 basis point range is the boundary.

The issue at hand is the Banc of America conduit currently in pre-marketing. This is the only deal on the calendar (a tightening factor), but as it the largest transaction of its kind, it may find difficulty distributing the paper (a widening factor). As Roger Lehman of Merrill Lynch notes, "The deal this size is likely to become a benchmark transaction, but the distribution of such a large amount of bonds...with a lot of investors on vacation has some market participants apprehensive." He believes that spreads will soften through Labor Day, but the technical characteristics argue for tighter spreads in the long run.

For the market in general, CMBS spreads have been moving in directions similar to other spread product - namely wider. Economic, political, and corporate woes are pressuring all corners of the market, but as researchers from Salomon Smith Barney note, there are characteristics of the CMBS market that will keep investors interested.

Unlike corporates and RMBS, the lower yield environment will not have the detrimental effects of prepayment and defaults that affect those other securities. They note that while CMBS appear rich to swaps, mainly due to the drop in swap yields, and may have caused some of the recent spread widening, if yields remain where they are "more investors could start buying CMBSs for their convexity and lack of corporate event risk," Salomon analysts stated.

Looking out to September, spreads could retract once the larger investor community is back from vacation. The only caveat here is that the September pipeline has over $5 billion already scheduled, mainly in conduits. This will likely mitigate any investor interest in the sector.

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