J.P. Morgan has adjusted its mid-year targets for spreads on both new issue mortgage bonds and those issued before the financial crisis to reflect a reduction in risks.
However analysts at the firm still expect that legacy CMBS can outperform new issues.
“Going into 2014, we expected new issue and legacy CMBS to diverge in spread performance,” the analysts wrote in a report published Friday. “We forecast that new issue CMBS spreads would widen (amid new supply) and the credit curve would steepen, while spreads on legacy CMBS would tighten. Risks that we thought could push new issue spreads wider included fiscal uncertainty around tapering and the debt ceiling.”
Over the past three months, however, these risks have significantly diminished: supply is lower than expected, tapering began without incident, and even Congress is “playing nice”, with a two year budget deal and a suspension of the debt limit through March 2015.
“While naturally some risks remain (underwriting quality, weaker than expected economic data/job growth), we believe the risk of spread widening has diminished,” the report stated.
J.P. Morgan now expects spreads on triple-A rated new issue CMBS to tighten to 80 basis points over swaps by mid-year; that’s 25 basis points tighter than its previous forecast of 105 basis points over swaps. As of Feb. 14, these spreads were at 87 basis points over swaps.
The firm expects spread on A4 legacy CMBS to tighten to 130 basis points over swaps at mid-year, versus its previous forecast of 140 basis points. As of Feb. 14, these spreads were at 153 basis points over swaps.
Over the week ended Feb. 21, spreads on new-issue CMBS tightened, with spreads on both five-year and 10-year super senior tranches coming in two basis points over swaps; over the month ended Feb. 21, spreads on five-year super seniors are 11 basis points tighter while spreads on 10-year super seniors are 2 basis points wider.