10.17.14: Treasury and Swap Rates Go on a Wild Ride!

Everyone involved in the origination and underwriting of CMBS conduit loans or the creation and selling of CMBS securities backed by the loans is keenly aware of the swap market. The swap rate is integral to the interest rate charged CMBS conduit loan borrowers and a key factor in the profitability of the sale of CMBS securities.

So market players were glued to their trading screens this week as the 10-year swap rate, which typically parallels movement in the 10-year Treasury bond, closed at 2.21% on Wednesday after falling to nearly 2.0% intraday while the Dow was in the process of shedding 400 points before the stock index recovered at the end of the trading day. Wednesday was the culmination of a relatively rapid decline in the 10-year swap rate from 2.78% 30 days ago.

Market professional believe investors have grown increasingly nervous about slowing global growth. While the U.S. economy remains healthy, investors are concerned about earnings growth this year and next because of the slowdown in Europe and, to a lesser degree, China. As a result, investment is flowing out of stocks and into Treasury securities, driving yields lower and swap rates along with them.

The rapid stock and bond market movement is wreaking short-term (hopefully) havoc on CMBS bond prices. Prior to Wednesday, the most recent CMBS offering to price was an $842-million deal from Citigroup, Starwood, 5 Mile and Goldman Sachs on Friday, October 10. The super-senior AAA-rated bonds priced at swaps plus 87 basis points (bp), within the 82-88 bp range seen in the past few weeks. However, dealers believe the next deal up, a $1.2-billion transaction by Deutsche Bank, UBS, Cantor Commercial Real Estate and Natixis, will have to carry a wider spread, perhaps in the mid-90s to provide an adequate yield to investors.

As a result, CMBS shops are struggling to figure out where to price new loans. The consensus is that most firms have compensated by widening their quotes 10-15 bp for plain-vanilla, CMBS conduit loans.

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This entry was posted in CMBS, CMBS Conduit Loans, CMBS Securities, Commercial Real Estate Loans, Michael D. Sneden, News & Recent Closings, The Banker's Mortgage Conduit, Valuexpress and tagged , , , , , , . Bookmark the permalink.

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