The fixed-rate CMBS pipeline has been on a month-long hiatus, drawing spreads three to four basis points tighter over the last few weeks to settle near their 2004 spread averages. For 10-year triple-As the average is in the 28 to 30 basis point range over swaps and for five-year triple-As the average is 31 basis points over. The sector is expected to hold in this range in the near term, but can be considered rich to other sectors on short-term measures.
Based on IFR data, 10-year triple-A spreads are trading rich to swaps and Treasurys as measured with a three-month z-score of -1.7 and -2.0, respectively. On a one-year basis, CMBS is neutral to Treasurys and.5 to swaps. Compared to other sectors in a three-month time frame, CMBS is rich to credit cards ABS (-2.0), home equity ABS (-1.3), current coupon mortgages (-1.2) and agency debentures (-0.7), while is neutral/cheap to single-A rated industrial corporates (0.18).
Looking at the forward supply, September has an estimated $3.5 billion in conduits across three deals, below this year's average monthly dollar total of $6.1 billion. This would bring the third quarter supply to near $15 billion, versus $22.3 billion for the second quarter and $15 billion in the 1Q04. More deals could come that can up the monthly totals to closer $6 billion.
October currently has seven deals slated for an $8.5 billion total. Using the average monthly totals for this year, total 2004 conduit production is estimated in the $73 to $75 billion range, a nearly 40% increase over 2003.
The expected deals have not started premarketing, but will start to surface mid month. Spreads look to hold at current levels for another week or so, but triple-As can expect to cheapen up by as much as three basis points, in anticipation of the new paper.
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