The CMBS market has been in high demand in 2005 with the triple-A 10-year sector tightening five basis points since the end of last year on a swaps basis and eight basis points versus Treasurys. This has the sector trading close to fair value versus competing sectors while still offering some attractive value.
The CMBS credit curve is steeper versus its 12-month averages, led last week by the double-A sector. The spread over triple-As tightened two basis points to five basis points versus a 12-month average of seven basis points. The triple-B spread versus triple-As also tightened two basis points, though remains three basis points cheap to 12-month averages. Single-As look to be the cheapest area of the curve, with triple-Bs running right behind.
Looking at CMBS versus other sectors, the sector is close to flat versus competing ABS sectors though is slightly rich. On a 12-month z-score basis, triple-A 10-year CMBS is trading at negative 0.4 versus credit cards, negative 0.6 versus single-A rated industrials, and negative 0.1 versus Agency debentures. Versus current coupon MBS, CMBS is trading rich at negative 2.1 and cheap versus home-equity ABS at plus 1.8.
The most compelling story for CMBS is versus the corporate sector. Despite the slightly rich features of 12-month averages, on short time frames, CMBS has cheapened. Looking at a three-month time frame, CMBS z-scores are 0.6 cheap. Lisa Pendergast, managing director at RBS Greenwich Capital, notes that the corporate sector has tightened due to supply technicals that have particularly impacted the triple-Bs. Spreads in CMBS have tightened three basis points since year-end 2004, while corporate triple-Bs have firmed 15 basis points. Over that time, corporate issuance is down 12% to 15% year-over-year while U.S. CMBS is running better than 16% above last year's pace. Because of that, Greenwich sees value in swapping out of triple-B REITs and into single-A or triple-B/triple-B minus CMBS. The triple-B REIT to CMBS trade offers around a 54 basis point spread pickup.
Looking at the CMBS pipeline, two deals priced last week for $4.4 billion - the $1.5 billion Credit Suisse First Boston conduit CSFB 05-C1 that priced last Thursday and the $2.9 billion offering from JPMorgan Securities JPMCC 05-LDP1 that priced Wednesday. Going forward, there is $12 billion in fixed conduit issuance planned for March, which would put monthly issuance over $17 billion and would make it the busiest month on record.
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