CMBS spreads reached a two-year high amid high levels of issuance and volatility in world capital markets. The long-term, super senior bonds from the most recent offering, led by Wells Fargo and Societe Generale, priced at a spread of 120 basis points (bp) over swaps. This level was the same as the prior CMBS deal led by JP Morgan and Barclays the week prior. And it was the highest spread since July 2013. Spreads on long-term, super senior CMBS have moved higher each month since early June, when deals priced in the 85-87 bp area. Spreads moved up as the month progressed, reaching 100 bp on June 30 and increasing to 110 bp in late July/early August.
Traders blamed the spread widening on a variety of factors. A recurring theme from CMBS issuers was the high level of issuance during July and August, which many said was too much for the market to absorb. With trading desks thinned by summer breaks, not enough buyers were available for all the bonds without a price break. In addition, the CMBS market tends to weaken in times of market uncertainty and volatility. The Greek debt crisis, China’s devaluation of the yuan, the fall of oil prices and the timing of a Federal Reserve interest rate increase have created uncertainty and volatility in the CMBS market.
But there is sentiment that prices will reverse course in September, particularly if the capital markets calm. Traders will be back at their desks, and given that CMBS still provides a compelling risk-adjusted yield, buying should pick up.
“The rise in yields on CMBS has not gone unnoticed at our affiliate, Country Bank, and it has green lighted a jump back into CMBS investing after being out of the market over a year due to low yields,” commented Jim Brett, head of CMBS research at ValueXpress. “It’s likely other investors will catch on to the compelling value proposition and buy, eventually reducing spreads.”