With Great Britain’s decision to exit the European Union (EU), the 10-year U.S. treasury yield had its largest single-day decline on Friday, and then on Monday, the yield fell to 1.46%, approaching its all-time intra-day low of 1.39% recorded in July 2012. Investors pushing Treasury yields lower will benefit commercial real estate borrowers as interest rates on commercial real estate loans, including CMBS conduit loans, are set based on a combination of treasury/swap yields plus a loan spread. The question at this time is whether Brexit will cause loan spreads to widen, reducing or eliminating the benefit of lower Treasury rates.
The near-term answer should surface during the week of June 27. Societe Generale and Cantor Fitzgerald are leading a $736.8-million CMBS offering expected to price at the end of the week. The offering is backed by loans from SocGen, CCRE, Natixis, Benefit Street Partners and Silverpeak Real Estate Finance. Dealers started marketing the transaction on Tuesday, June 21, but held off on circulating price guidance pending the results of the Brexit referendum this past Friday, rightly expecting that the vote to exit would have a negative impact on financial markets.
The previous conduit deal priced on May 20. The long-term, super-senior AAA-rated bonds were placed at a spread of 114 basis points (bp) over swaps. The corresponding benchmark bonds in three other deals priced three days earlier at spreads ranging from 110 bp to 125 bp. CMBS pros are looking to the SGCMS transaction to establish the current pricing level.