• Premiums on commercial mortgage-backed securities tighten
  • Sluggish issuance and maturing debt reduces CMBS availability

Investors in U.S. commercial mortgage-backed debt are discovering the truth in an old firehouse cooking axiom: If you’re hungry, everything tastes great.

That’s how analysts at Deutsche Bank AG characterize money managers’ appetite for the dwindling supply of the securities -- which are backed by loans for hotels, malls and offices -- that has slashed spreads. The premium paid on CMBS rated BBB-, the lowest investment-grade level before junk, has tumbled 105 basis points over the last month, more than 10 times the spread compression of investment-grade corporate bonds, Edward Reardon and Simon Mui wrote in a note dated Aug. 2.

Sales of property-backed debt have struggled this year after a volatile January and February forced issuers to put planned deals on ice. Issuance has tumbled to $32.8 billion, 43 percent below volumes this time last year, data compiled by Bloomberg show. Those declines combined with maturing debt sliced the total CMBS universe by $61.5 billion, according to data from the Securities Industry and Financial Markets Association. All that has investors fighting for the leftovers.

“The true Fireman’s Recipe is simple: make sure your dinner guests are famished before you finally feed them,” Reardon and Mui wrote. “By the time everyone sits down to eat, they are so ravenous that whatever you made tastes great and will be devoured. It really works.”

Spreads Tighten

The analysts see a parallel with buying structured debt right now. “CMBS investors are desperately hungry for more bonds,” they wrote.

Deutsche Bank and JPMorgan Chase & Co. last week sold a chunk of an $894 million offering at 108 basis points over swaps, the lowest spread this year for comparable securities. Wells Fargo & Co. is aiming to surpass that this week, marketing a similar part of the transaction at around 97 basis points. This sale would be the first to comply with new risk-retention rules.

The supply-demand imbalance could sap trading volume, according to Deutsche’s Reardon and Mui. Money managers may be more hesitant to trade CMBS given how hard rebuilding a position in the securities could be, they wrote.

“Selling CMBS would require significant conviction that the sector can underperform,” they wrote, “and we have not heard that view from many investors.”

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