Heavy supply has helped keep spreads on commercial mortgage bonds range-bound over the past couple of weeks, according to research published Friday by J.P. Morgan.
Private label issuance in the fourth quarter has reached $21.6 billion, with an additional $2.0 billion on the way in two conduit deals currently in the market. This has pulled investor focus to the primary market form the secondary market, according to analysts at J.P. Morgan.
Spreads on A4s have tightened just 1 basis point over the past two weeks to swaps plus 173 basis points, while 10-year new issue AAAs are 2 basis points wider at swaps plus 95 basis points.
J.P. Morgan expects spreads to remain range-bound through year-end, and while January is typically a strong month for spread tightening, the firm thinks that volatility could re-emerge at the start of the year depending on the timing of the Federal Reserve’s tapering of its bond buying program.
Year-to-date, private label issuance has reached $78.3 billion, and will total approximately $81 billion by year-end, or 80% growth versus 2012 volume. In 2014, J.P. Morgan projects more supply growth; it looks for private label issuance to reach $86 billion, aided by increased acquisition volume and continued demand for commercial real estate, as well as prepayments and defeasance of loans originated at the peak of the market.
Prepayments of 2005-2007 vintage loans have totaled more than $10 billion in 2013 YTD, and J.P. Morgan expects it to continue next year as borrowers attempt to lock in lower rates when still possible, even if it means paying a penalty to do so.
