The calendar has been more a topic of discussion than anything else of late with secondary market flows in CMBS nearly at a halt. With a still manageable and steady flow of supply in the pipeline, spreads in the high-credit sector are not at risk of cheapening. In fact, triple-A spreads remain a couple of basis points outside of the six-month average of 47 basis points to swap in the 10-year sector. Most shops consider current spread levels on AAAs to be fairly valued to slightly rich versus other spread sectors, namely RMBS, home-equity ABS, and agency debt.
That triple-As remain a well bid sector is no surprise, especially given the woes of the corporate market and subsequent crossover buying into CMBS. The other technical event keeping spreads tight is the light pace of supply. Greenwich Capital estimates domestic supply to be 17% lower through April 2002 versus the same period last year and that total 2002 issuance will be 20% less. This is not, however, due to a drop in conduit volume.
Over $10 billion of conduit supply has hit the market so far this year with another $3.2 billion possible through month-end. Over the first five months of 2001, $12.7 billion in conduit volume was priced. Of the three conduit deals considered to be May business, at least one is likely to resurface in June with little time to garner enough interest in all three, considering the upcoming Memorial Day holiday.
Looking at the current calendar, two issues have priced since May 9. The first was a Bank of America conduit that was brought with co-manager Merrill Lynch, and the second, Wachovia's $950 million conduit was led by Wachovia Securities, Greenwich, and Nomura. Both deals saw the 10-year triple-A-rated tranches print at market levels (47bp/Swaps), but the Wachovia deal struggled with the triple-Bs.
Aside from talk that collateral might have been an issue, those credits are trading rather rich. As Salomon Smith Barney points out, "traditional portfolio buyers feel that the current yields are too low, and the CBO bidders see little arbitrage value in triple-B paper at current levels. After a slight delay, the triple-B-rated tranches for the Wachovia conduit finally came 10 basis points wide of initial price talk (See scorecards p. 29).
Many were also pointing to the fact the credit curve was too flat and some steepening was inevitable anyway. At 63 basis points over Swaps the triple-A to triple-B curve is roughly three basis points steeper than a week ago, but is still far from the 72 and 87 basis point averages of 2002 and 2001, respectively, according to Greenwich.
Merrill Lynch's Roger Lehman thinks that while still rich, triple-Bs are nearing fair value. The triple-B-minus sector, however, is still 15 basis points or so rich, and single-As could stand some cheapening as well, Lehman added.