Spreads on CMBS securities have widened after Russia invaded Ukraine on February 24. Market participants are hopeful the widening is temporary, but a prolonged war and associated economic impact could extend the recovery period for spreads. Prior to the war, spreads were already leaking wider on the prospect of Federal Reserve forward rate policy negatively impacting the economy and CMBS spreads. The war accelerated this trend.
At the beginning of February, the Super-senior, long-term, AAA-rated CMBS securities were trading at 80 basis points (bp) over the swap rate, which was up from about 70 bp in December 2021. After the invasion, the AAA-rated CMBS securities moved out to roughly 100 bp over the swap rate. CMBS spreads may remain volatile for a while.
Investors in CMBS securities were torn between the need to put their CMBS capital to work on one hand and growing concerns about how the invasion would affect the world economy, particularly Europe, on the other hand. Many investors were inclined to sit on their hands until the dust settles, reducing demand for CMBS bonds.
Spreads on CMBS securities are important to CMBS borrowers as the “loan spread” found in CMBS loan applications is derived from the spreads on CMBS securities, particularly Super-senior, long-term, AAA-rated CMBS. While not an exact relationship, a 1 bp increase or decrease in AAA-rated CMBS spreads translates into a 1 bp increase or decrease in loan spread in new CMBS applications. Since CMBS spreads have increased roughly 30 bp, borrowers are seeing spreads increase 30 bp in new CMBS loan applications.