The CMBS market may get a turbo boost early next year, when an updated benchmark will enable market participants to more effectively hedge positions and engage in relative value trades.
The CMBS market has gained steam as commercial real estate (CRE) prices have rebounded, and barring any events negatively impacting the economy, its volume may top $40 billion, a more than 15% increase over 2011.
RBS Securities analysts published a report in early August stating that CMBX.6, an updated CMBS index anticipated to be launched by valuation-data provider Markit at the start of 2013, should provide a market boost as well as a tool to bet on relative value moves."We believe CMBX.6 may be a catalyst for the future growth, as it will provide a more efficient hedging tool for CMBS 3.0 conduit loans and allow market participants to express relative value views on the CMBS 3.0 bonds across the capital structure," the report said.
CMBS 3.0 refers to bonds issued since the start of 2011, and the new benchmark is expected to result in more highly correlated hedges than the earlier CMBX versions market participants must use today. "Most market participants are using old vintages of CMBX to hedge CMBS exposure. It is still the most liquid and efficient tool in the asset class, but it references CMBS deals issued between 2005 and 2008. The CMBX.6 will be better representative of more recently issued CMBS, and more useful to investors with exposure to newer deals," said Ned Lipes, director in Markit's structured finance group.
Lipes said Markit's feedback on the benchmark indicates that market participants are seeking a benchmark that more accurately reflects the structure of today's CMBS deals as well as a vehicle to take long and short positions in the CMBS market. For example, CMBX.6 is likely to have many fewer sub-indices representing the capital structure due to the ratings agencies' more streamlined approach to rating deals. "One of the best drivers of a new-issue market is a viable hedge, and it's better to have one that is more closely tied to the new issues that an investor is purchasing," Lipes said.
The CMBX.6, and its correlation with movements in the underlying CMBS market, provides relative opportunity within the CMBS asset class.