Aug. 8 (Bloomberg) -- Yields on commercial real estate securities relative to benchmark rates rose to the highest since March on concern that retailers won't be able to repay debt as consumers cut spending.

Spreads on AAA rated commercial mortgage-backed bonds widened 10 basis points during the week ended yesterday to 250.5 basis points more than 10-year swap rates, according to data from Bank of America Corp. A basis point is 0.01 percentage point.

Demand for commercial real estate securities is waning as retailers are forced into bankruptcy during the economic slowdown. Mervyn's LLC, Linens 'n Things Inc., Boscov's Inc. and Steve & Barry's LLC have all filed for bankruptcy protection during the past six months.

``As we have been highlighting for some time, we remain concerned about the retail sector given the economic stresses facing the consumer,'' Merrill Lynch & Co. analysts Roger Lehman and Julia Tcherkassova in New York wrote in a report yesterday.

Spreads hit a high of 312.4 basis points on March 10, the week before the Federal Reserve stepped in to arrange JPMorgan Chase & Co.'s purchase of Bear Stearns Cos. Spreads on the debt have been widening since trading as low as 128.6 basis points over the benchmark on May 20.

U.S. retailers' sales rose in July at the slowest pace in four months, the International Council of Shopping Centers said yesterday. Sales during the back-to-school season may be the slowest since 2001, the trade group said.

`Attractive Levels'

The risk to the safest commercial real estate debt may be overstated judging from where the bonds are currently trading, said Kenneth Hackel, managing director of fixed-income strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut. It's much harder for investors to boost returns on securities using borrowed cash, which has contributed to wider spreads, he said.

``For highly rated commercial mortgage securities, these are very attractive levels from a value perspective, but value is not driving the boat,'' Hackel said today in a telephone interview.

Commercial mortgage delinquencies remain low compared with historic rates, according to Citigroup Inc. analysts led by Darrell Wheeler in New York. At 0.44 percent as of July, the delinquency rate has increased by about 5 basis points since the end of last year, the analysts wrote in a report today.

``If an economic slowdown is prolonged, we expect to see rising delinquency rates from these low levels, possibly in the 1 to 1.5 percent range,'' the Citigroup analysts said.

Boscov's

Boscov's, the department store chain founded in 1911 in Reading, Pennsylvania, succumbed to the slowdown in consumer spending when it filed for bankruptcy on Aug. 4. The chain's loans show up in 28 commercial mortgage-backed deals, according to the Merrill analysts, totaling about $393 million.

The commercial mortgage bond market is diversified enough to withstand problems with individual retailers, but the ``sum total of multiple problems will start to add up,'' the analysts wrote.

Losses on commercial mortgage securities may reach between 5.3 percent and 8 percent, depending on when the loans were underwritten, Morgan Stanley analysts Andy Day and Vishwanath Tirupattur in New York wrote in a report today.

Commercial mortgage securities are commonly priced off of the swap rate, a borrowing benchmark. The 10-year rate is currently at 4.68 percent.

To contact the reporter on this story: Sarah Mulholland in New York at smulholland3@bloomberg.net

Last Updated: August 8, 2008 16:06 EDT