Bloomberg News

CMBS Beating Bank Bonds as Investors Wager on Property Recovery

December 10, 2012

Securities linked to commercial- property loans are rallying, beating out corporate bonds issued by lenders as investors wager on a real-estate recovery.

Relative yields on senior bonds tied to skyscrapers, shopping malls and hotels have narrowed 30 basis points to 145 basis points more than benchmark swap rates since mid-November, reaching the tightest level since mid-2008, according to JPMorgan Chase & Co. Spreads on debt from financial companies declined 6 basis points, or 0.6 percentage point, to 143 basis points over swaps, JPMorgan analysts said in a Dec. 7 report.

Commercial-mortgage backed securities are benefiting with interest rates forecast to stay close to zero through mid-2015, pushing investors toward riskier assets and aiding property owners with loans coming due. Wall Street banks are accelerating the pace of originations to meet demand from bond buyers, leading to a lending boom for borrowers across the U.S.

“Improving financing conditions are a clear positive for the legacy CMBS market,” said the JPMorgan analysts led by Ed Reardon in New York, referring to commercial-mortgage backed securities sold during the peak of the property bubble before credit markets froze after the September 2008 collapse of Lehman Brothers Holdings Inc. “The increased availability of leverage will allow more loans to refinance.”

Easier Payoffs

Commercial-mortgage bonds have gained 0.374 percent since Nov. 14, compared with 0.209 percent for similar bonds from financial companies, according to Bank of America Merrill Lynch index data.

Lenders issued about $16 billion of bonds tied to everything from mobile home parks to skyscrapers in the fourth quarter, a post-crisis record, according to JPMorgan. Sales are on pace to reach $46 billion in 2012, almost 50 percent more than last year, the analysts said. JPMorgan forecasts $55 billion in sales in 2013.

Landlords are finding it easier to pay off maturing loans as sales rise. More than 60 percent of commercial mortgages contained in bonds paid off on time in November for the third consecutive month, according to Trepp LLC. Prior to September, the monthly payoff rate had only surpassed 60 percent twice since the beginning of 2009, the New York-based commercial- mortgage data provider said in a report today.

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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