-- Daniel O’Leary
U.S. market players are warning recent heavy trading flows on the synthetic commercial mortgage-backed indexes could be hugely overdone. Certain subordinate senior bonds are now close to par—a first in three years—at the same underlying commercial property prices are expected to drop.
A CMBS trader said buyers are reaching for yield on assets they think are underpriced. But, he said the rally and market were overdone as fundamentals did not add up. “I don’t think we’ve seen the bottom of the commercial property market yet,” the trader explained. “There’s still room for the assets to get cheaper.”
Trading on CMBX has been heavy on all senior AAA assets this summer, amid light new bond issuance. The CMBX 2005 AM3 class recently priced at par, the first time this had occurred in three years, according to the trader.
Barclays Capital research yesterday showed bids on some 2005 AM tranches were about $101. “On average, we believe that the 2005 AMs are marked at $97-$98 with the [poorer] names trading at about $90 and the better names trading above par,” the firm said. The AMs last peaked in April, with the 2005 AMs pricing at about $93 on average.
Julia Tcherkassova, director at BarCap, said both real and fast money investors have been making the market move. “The cash CMBS market remained very active this week with fast money accounts and some insurance companies selling some AMs and AJ tranches, as many AMs are now trading above par,” she said. “The buyers side of the market is still dominated by the real money accounts, some of them apparently reducing their internal weighting of probability of a double dip recession.” Tcherkassova said the disjointed supply and demand of new....