Trepp reported that the powerful rally in the CMBS market that started at the beginning of 2012 extended for a second month, giving investors a lot to cheer about in February: The market has tightened in four of the last five months. After a miserable stretch from June through mid-September 2011, the market reversed course with a powerful rally. The market was tighter in October, essentially flat in November, and tighter in December, January and now February.
Overall, spreads on legacy (pre-2008 issue) super senior CMBS with 30% original credit enhancement narrowed 20-35 basis points (BP) during the month. Those with smaller gains tended to be bonds that were well respected and were already trading at relatively tight levels. The bigger gains came from bonds backed by more questionable collateral.
The benchmark GSMS GG10 CMBS issue super senior class A4 bond ended February at 219 BP over swaps. This was 30 BP tighter than January’s closing level. Since the beginning of 2012, the spread on the GG10 has fallen 59 BP, which corresponds to more than three points of price appreciation since the beginning of the year. The GG10 price is firmly in “super premium” territory with its price approaching $112.
To give the recent rally some perspective, 2005 super senior class A4 bonds are now changing hands at 100 BP over swaps (or better in many cases), while 2006 super senior class A4 bonds can be seen trading at 125 BP over swaps. We noted that the AM class and AJ class sectors had seen significant tightening in January. Each of those markets continued to rally in February, but the gains weren’t nearly as lavish. Trepp estimates the gains in those segments at 30-40 BP for the AMs and 50-60 BP for the AJs. In January, the spread tightening of some AJs was off the charts.