The CMBS market is reportedly back to "normal" trading flows, insofar as the number of participants and ease of trade execution are concerned.

What is not so normal is the general quietude by investors waiting for the other shoe to drop. Said footwear comes by way of a deep, vanilla conduit that can shed some light on where the market feels spreads should be, and how they feel about the CMBS market in general.

The long-term implications of hotel and retail-type property will take months to work out, if not longer, and is limiting some interest of deals in the pipeline. One such issue, the Greenwich Capital floater, has over 23% hotel exposure and is said to be impeding marketing efforts for that offering. By contrast, there is strong interest in the upcoming $1 billion Bank of America conduit that began marketing, albeit quietly, on October 15. Guidance was unavailable at the time of this writf issuance as single asset/borrower deals are delayed and/or restructured. That percentage level of total volume has not been seen since mid-1999.

Spreads firming

in secondary

Secondary markets were active last week with better buying and little selling of which to speak. There was interest in slight premium paper (under-$105), but as CSFB notes, scarcity in those issues are starting to push flows of super-premiums higher as well. Activity in $102-$103 dollar price paper came at mid-60 bps to swaps, according to Salomon Smith Barney, down from recent high +60 bps levels and low 70s before the Treasury curve backed up. This, the firm says, implies +62 bps levels for triple-As, slightly tighter than levels from a week ago. Lehman Brothers talked of interest in triple-A five- and seven-year second-pay classes, and some first-pay interest from yield-seeking banks.

Why wait?

The outlook for CMBS, especially conduits, looks sound and should be exploited at current levels. CSFB, like many firms, are cognizant of the spread stabilization, and in some cases tightening that has occurred over the last week or so.

They believe that spreads have peaked and the current market is a good point of entry. Conduits should see the first signs of recovery once investors rally behind the sector. Merrill's Lehman is lifting a basis bias as well, and is reversing his belief that CMBS spreads will widen further to agencies. Instead, he is looking for spreads to tighten in concert with other benchmarks, absent any general credit widening in the markets.

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