Investors Should Pare Bullish Bets on Bubble-Era CMBS, RBS Says

Investors may want to cut bullish bets on a derivative index linked to commercial-mortgage backed securities after a three-month rally, according to Royal Bank of Scotland Group Plc.

“While we have been bullish on the market since early July, we are now questioning if CMBS has rallied too far too fast,” Royal Bank of Scotland analysts led by Richard Hill said in a report today. “A spike in volatility driven by renewed global macro concerns may temper the recent rally.”

Values on Markit Group Ltd.’s CMBX index linked to commercial-mortgage bonds sold during the market’s peak have risen to the highest in almost a year as a lull in Europe’s debt crisis and speculation that policy makers will step in spur gains, according to RBS. Prices on an index linked to debt issued in 2006 have climbed to 88.94, the highest in more than a year. Values on the gauge rise as investor confidence improves.

Current levels may make it hard for the rally to continue through year-end as investors attempt to lock in profits, according to RBS. It may be time to take “some chips off the table,” the analysts said.

Investors sought to unload about $4.25 billion in commercial-mortgage bonds last week, 64 percent more than the average weekly volume in 2012, according to data provider Empirasign Strategies LLC. Some of the selling came from so- called fast-money holders, primarily hedge funds, looking to take gains, according to Barclays Plc.

Riskier debt fell amid the flood, with values declining as much as three cents on the dollar, Barclays analysts led by Keerthi Raghavan said in an Aug. 17 report. Wall Street dealers probably ended up buying most of the lower-ranking bonds, signaling the potential for more selling, according to Barclays.

“The dealer community is at best a short-term home,” the analysts said. “A sharp turn lower in the macro-environment could lead to more supply.”

To contact the reporter on this story: Sarah Mulholland in New York at

To contact the editor responsible for this story: Alan Goldstein at

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