The second week of the year has passed, and still the CMBS calendar remains barren. This should come as no alarm, however, as the huge spate of issuance toward the end of 2001 was more than enough to distribute and upcoming industry conferences in January slow down activity. Despite, and in light of the supply dearth, spreads have made impressive strides in the face of investors, flush with cash, making for well-diversified spread products.

At the moment, spreads for triple-A 10s have narrowed to 46 basis points over swaps, down from 54 basis points as of the final conduit pricing of 2001. This has come on solid secondary market interest on expectations that supply may be lacking well into the first quarter. Note that at 46 basis points, this puts CMBS back to pre-Sept. 11 levels and within the tights of the 2001.

That spreads tightened over the first of the year is not a surprise, but the rapid pace of the tightening certainly was. Spread product in general has been favored over the last week or so, especially for mortgage-related paper. Better economic expectations have been a catalyst for the trade, as was mentioned in last week's piece, but with the tight spreads currently seen, there is some question as to further gains in the sector.

Merrill Lynch's Roger Lehman, also impressed and surprised by the pace of the move in spreads, now expects CMBS to bounce in a range of 45-50 basis points for the next couple of months. "While we would not call CMBS very rich, it has lost some of its luster with spreads 16 basis points tighter since November," said Lehman. At the same time, near-term technicals and momentum are positives for the sector and could press spreads below 45 but not through 40, which would trigger profit taking, Lehman added.

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