In the CMBS sector, spreads have been tightening across the longer-maturity single-A rated tranches, and within those credits the double-A sector has been outperforming. The spread between triple-A and double-A is only six basis points, where the historical pick-up has been seven basis points over the last year and nine basis points over the last three years on average. The pickup for going further down credit shows that the double-A to single-A spread is 10 basis points, when it used to be nine basis points on average over the last year.

In recent comments from Merrill Lynch, Roger Lehman, managing director of mortgage research explores some "inefficiencies" in the triple-A sector. Lehman believes the traditional triple-As - basically tranches from deals prior to the senior/sub triple-A structure that began with the Oct. 27, 2004, CSFB 04-C4 transaction - offer good value, especially when compared to both of the new senior and junior triple-A tranches.

Looking at the recently priced MSCT 05-IQ9 transaction, the pick-up for super seniors - 21 basis points over swaps - versus traditional triple-As - recently at 23 basis points over swaps - seems rich in Lehman's opinion. Additionally, traditional triple-As offer better value for similar spread, structure and liquidity as the juniors, he said.

Given the aforementioned richness in double-As, Merrill's Lehman would nonetheless prefer the junior triple-As relative to double-As given their better credit, liquidity, and maturity for only a two basis points pickup.

Lower credits, down in the triple-B area, have seen less movement. As RBS Greenwich Capital Managing Director Lisa Pendergast notes in recent comments, new issue spreads have been sticky due, in their view, to too little credit support during

a period of rising concerns over underwriting standards.

Along the credit curve, the double-A sector is trading the richest, as measured by 12-month z-scores. According to these measures, the single-A sectors offer the cheapest pick-up based on the average 12-month spread.

Copyright 2005 Thomson Media Inc. All Rights Reserved.

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