While the CMBS market is projected to hold onto some of the record pace set in the first half of the year, spreads are likely to remain firm. The pace and size of issuance may not allow for much tightening, but the cheapness in the sector suggests there isn't any spread widening in the future.
There was a large $2.6 billion Goldman/GCM conduit that priced last Thursday. The guidance was for the $1.5 billion, 9.73-year average life triple-A tranche at 35 basis points over swaps. This is two basis points wide of where the second-pay tranche priced the MSCT 04-TOP15 issue and suggests that investors are pricing in some concession for the abundant supply. Still, secondary spreads in the 10-year sector are in the 32 to 33 basis point area over swaps, so investor demand will likely soften some of the new-issue concession. Behind the GG 2004-C2 issue, GMAC will bring a $933 million conduit sometime this week.
Despite the heavy issuance, the CMBS sector is cheap versus just about all of the competing sectors and relative to its short-term historical levels. Lisa Pendergast of RBS Greenwich Capital notes that most classes, single-A and triple-B rated especially, are three to eight basis points cheap to their six-month averages. RBS Greenwich believes that this is partly attributed to investors having been distracted with the possibility of higher rates going into the June FOMC meeting.
A consistent recommendation coming from a number of dealers is that triple-A CMBS are trading cheap to single-A-rated corporates. JPMorgan Securities suggested in research last week that investors should sell single-A rated corporates for a 22 basis point spread pickup in 10-year triple-A CMBS - the widest margin in roughly five years.
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