CMBS prices picked up about 45 basis points (bp) in July based on the change in spread for the benchmark CMBS bond, GSMS 2007-GG10 A4. At the beginning of July, the benchmark bond was trading at about 390 bp over swaps, while finishing the month at 345 bp over swaps. In fact, some of the better performing 2007 vintage A4 bonds are trading at even tighter spreads in the area of 275-300 bp over swaps. At these spreads, 2007 A4 bonds are trading at significant premiums to par, or a dollar price of $1.04-$1.08. However, the premiums are bumping up against the limits of what many investors are willing to pay. Market participants are indicating that if dollar prices do not drop soon, investors will begin to look elsewhere for higher yields.
“We have been avoiding A4 CMBS for a while for our managed accounts,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “ For about two years now we have been performing analytics on the underlying properties in all of the CMBS issues for 2004-2008 and have identified those issues that are anticipated to outperform. We have been buying AAA-rated Class AM and Class AJ bonds from 2004-2006 for a client at dollar prices in the low 90s, providing excellent yields in the 6.5% area, superior to the 5-5.5% afforded by A4s,” said Sneden.