On a spread basis, mezzanine triple-As currently offer the best value within the 10-year triple-A sector, said Morgan Stanley analysts in a recent report.
Within the triple-A stack, analysts said that junior triple-As have the best value in terms of fundamentals. As analysts have explained previously, they feel that the subordination level of junior triple-As offer enough protection to bondholders. Analysts still suggest this bond to yield buyers who plan to hold their portfolio to maturity.
However, since the end of 2005, the spread difference between super-senior triple-As and AJs have tightened to 9 from 13 basis points. Since the spread difference between the two has only been tighter in the first few weeks after the 30% super-senior bond was first introduced, Morgan Stanley analysts think that the spread difference is at the tight end of its normal range.
For relative value investors, analysts also suggest looking at the mezzanine triple-A bond. Currently, the spread between AM and AJ is four basis points, compared to eight basis points at the end of last year. In short, compared to late last year, investors can now pay just half the price for the additional subordination - 7% on average - from AJ to AM. For those who prefer a little more subordination, the AM seems to offer the best value.
Analysts also recommended looking at double-A CMBS. Historically, CMBS spreads are tighter versus home equities spreads of comparable credit quality for every rating. However, since November 2005, double-A CMBS spreads drifted outside that of double-A HEL spreads. At the end of last month, double-A CMBS were trading four basis points wider than double-A home equities, compared to a two-year average of 10 basis points tighter.
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