Within the CMBS marketplace, 10Y AAA CMBS now appear cheap vs. AA, A and BBB classes due to the flattening of the yield curve. However, 10Y AAA CMBS still remain -1.62 standard deviations rich to 5Y AAAs with only a one bp spread differential between the 5Y and 10Y AAA classes. The best relative value within the CMBS market can be found within those sectors with mispriced’ optionality. To wit, despite the relative cheapness of new-issue 5Y AAAs and the tightening in PAC IOs, continues to hold that there is better value in PAC IOs.
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