Commercial-Mortgage Bond Trades Surge Amid Boost in Offerings
Commercial-mortgage bond trading surged this week after a rally pushed values on some of the riskiest boom-era securities to the highest in five months.
Investors have sought bids on $4.25 billion of debt linked to everything from skyscrapers to strip malls the past week, 64 percent more than the average weekly volume in 2012, according to Empirasign Strategies LLC, a New York-based data provider.
Investors are unloading commercial-mortgage backed securities after prices for debt issued during the market’s peak in 2007 reached the highest since March, according to Barclays Plc. Values have held up “very well” amid the increased sales, according to Tom Digan, head trader at Sorin Capital Management LLC, an investment firm specializing in commercial real-estate bonds.
“Investors are searching for yield,” Digan said. CMBS “offer attractive risk-adjusted yields relative to most other fixed-income alternatives.”
Buyers have been snapping up commercial-mortgage debt amid speculation the Federal Reserve will keep its benchmark interest rate target near zero until mid-2015.
The extra yield investors demand to own top-ranked bonds linked to commercial-property loans instead of Treasuries has declined 48 basis points to 147 basis points, or 1.47 percentage points, more than Treasuries in the past two months, according to a Barclays Plc index. The spread is the lowest since at least January 2008.
This week’s sales have been focused on so-called AJ and AM commercial-mortgage bonds, many of which have been downgraded after being assigned top grades at issuance.
“We have already seen over $1.3 billion of AM and AJ supply this week, which is typically what we have been seeing over the course of the entire month,” said Sorin’s Digan.
The Federal Reserve Bank of New York and UBS AG this year 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, though the deluge of lower-rated securities may weigh on values when investors want to sell, Credit Suisse Group AG analysts said in a May 17 report. Demand has been “robust” during this week’s sales, the Credit Suisse analysts said in a report yesterday.
“Despite the wave of selling, the market has, so far, absorbed the supply,” according to the New York-based analysts led by Roger Lehman.
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