Bloomberg News

Commercial-Mortgage Bonds Gain as Investors Succumb to Low Rates

July 23, 2012

Commercial-Mortgage Bonds Gain as Investors Succumb to Low Rates

Empty retail space in New York. Photographer: Emmanuel Dunand/AFP/Getty Images

Demand for commercial-mortgage bonds surged this month as the Federal Reserve’s efforts to revive the economy push investors toward riskier debt, sending relative yields to the lowest in more than four years.

Top-ranked securities tied to everything from skyscrapers to mobile-home parks sold before the credit crisis shuttered the market in 2008 are paying holders 172 basis points more than Treasuries, down from 186 basis points on June 29, according to a Barclays Plc index. That is the lowest spread since at least January 2008, the index data show.

Buyers are gravitating toward the bonds with the Fed keeping interest rates at record lows into a fourth year amid flagging U.S. growth and Europe’s spreading debt crisis. Commercial-mortgage bonds are benefiting as investors come to terms with a more prolonged period of low returns, according to Amherst Securities Group LP.

“It dawned upon the market that the 10-year Treasury could remain at or near 1.5 percent well into 2014,” wrote the analysts led by Darrell Wheeler. The benchmark Treasury yield slid to a new record, touching 1.3960 percent today.

Demand for newly issued debt is also recovering after faltering in May and June. Wells Fargo & Co. and Royal Bank of Scotland Group Plc last week issued top-ranked securities maturing in about 10 years yielding 120 basis points more than the benchmark swap rate, the narrowest spread since April, according to Deutsche Bank AG data. UBS and Barclays sold similar debt paying 160 basis points over the benchmark on June 28, the widest level since October, Deutsche Bank data show.

Delinquency Rates

Wall Street has arranged about $18.2 billion in commercial mortgage-backed securities this year, compared with $28 billion in all of 2011, according to data compiled by Bloomberg. A record $232 billion of the debt was sold in 2007.

Bonds sold during the market’s peak in 2006 and 2007, registering record delinquency rates surpassing 10 percent, may not be able to sustain recent gains, according to Deutsche Bank.

“Yield capitulation will primarily benefit the new issue market,” the analysts wrote.

Commercial-mortgage bond prices are holding up today even as Spain’s deepening fiscal turmoil spooks markets, according to Stephen Schwartz, who trades the debt at RBC Capital Markets in New York. The spread on a commonly cited benchmark bond issued during the market’s peak by Goldman Sachs Group Inc. and RBS, one of the most volatile securities in the $550 billion market, widened about 8 basis points to 235 basis points more than swaps, he said.

“Anything that has a little bit of extra yield is seeing strong demand. A small sell-off in equities isn’t enough to change that dynamic,” Schwartz said.

To contact the reporter on this story: Sarah Mulholland in New York at smulholland3@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net


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