Commercial-mortgage securities are slumping as a flood of bonds dumped on the market during the past month weighs on values amid mounting concerns that Europe’s debt crisis can’t be contained.
Relative yields on top-ranked debt tied to property loans have climbed 14 basis points in May to 200 basis points more than Treasuries, the highest level in more than a month, according to a Barclays Plc index. Bonds that are perceived to be of lower quality were pressured the most, Credit Suisse Group AG analysts said in a report today.
The Federal Reserve Bank of New York and UBS AG sold $9 billion in bonds tied to skyscrapers, shopping malls and hotels, in two auctions, starting with the district bank’s record sale on April 26. Demand for the debt exceeded expectations, even while the deluge of lower-rated securities has reduced values, according to Credit Suisse.
“Macro concerns may be the initial impetus for the move over the past several days,” said the New York-based analysts led by Roger Lehman. “Renewed concerns over European sovereign risk, and specifically the future of Greece staying in the euro zone, have been a factor as has JP Morgan’s announced losses from derivative trading,” the analysts wrote. “Pressure has been exaggerated by the new supply.”
Investors “appear” to have started to sell bonds from the so-called Max deals, two collateralized debt obligations assumed by the Fed in the rescue of American International Group Inc. and held in its Maiden III LLC portfolio, according to Credit Suisse.
Fed Postpones Sale
The New York Fed postponed a sale that had been scheduled to be completed today of $1.7 billion of home-loan debt contained in the same portfolio.
The Max deals had a face value of about $7.5 billion, of which $3.4 billion was cut to junk after being granted top grades at issuance, according to Citigroup Inc. data. Those bonds, typically traded by hedge funds and Wall Street dealers, are probably in for a “bumpier ride” than debt carrying top grades, Citigroup analysts led by Jeffrey Berenbaum, who is based in New York, said in a report last month following the Fed’s auction.
Barclays and Morgan Stanley were the winning bidders on $1.5 billion of securities similar to the Max deals sold by UBS last week, according to people familiar with the sale.
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