Even though Royal Bank of Scotland (RBS) analysts have been bullish on the CMBS market since early July, they are currently questioning if the sector has rallied too far too fast.

They said that CMBX prices have rallied for three straight months due to three factors: the lack of European bad news; the hopes for more monetary stimulus; and the high demand for longer duration and fixed-rate assets.

In this time period, total returns have risen an average of 3.4%, ranging from 1.4% (AAA.1) to 5.3% (AJ.2) with volatility dropping to its lowest levels in several years.

Analysts cited the fact that many CMBX.AAA, AM and AJ tranches are trading at or close to their highest prices in almost a year after rising an average of 2.4 points for CMBX.AAA tranches, 3.3 points for CMBX.AM tranches and 4.1 points for CMBX.AJ tranches over the past three months. 

They think that the current price levels might limit the chances of a sustained rally through yearend, even if market conditions stay comparatively stable.

In support of this is the heavy selling, specifically in higher beta AM and AJ tranches that was experienced last week as some market players tried to take profits, analysts said.

There might also be a chance for a volatility spike caused by renewed global macro concerns regarding the next several months that might suppress the recent rally. 

Volatility is now close to its lowest levels since 2007, with the VIX touching 13.7 last week, analysts noted.

The firm's corporate strategists in their Aug. 17 Credit Strategy Weekly report said that they suspect that the current benign conditions in the financial markets can prove to be financially painful as economic and political challenges resurface.

For these reasons, RBS CMBS analysts suggested that investors pair down their long positions to wait for better entry points.

Specifically, they recommend unwinding long AM.2 as their linear regression analysis of historical CMBX prices implies that AM.2 might be one of the richest CMBX tranches.

They noted that the tranche is trading at its highest level in more than a year at 88.94, which is 3.7 points over its trailing 10-month average.


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