After the 10-year Swap Rate (Swap) Index used to set CMBS conduit rates jumped from 2.37% to 2.60% on June 19 while Federal Reserve Chairman Bernanke spoke at a press conference and further spiked to 2.86% on Monday, June 24, the index has settled into a range of 2.80%-2.90%. Since the July 4th U.S. holiday, the index has traded within this band, and traders are seeing stabilization of the Swap at these levels. Federal Reserve Chairman Bernanke gave markets some respite this week when he signaled in the release of the June Fed meeting notes that his signature bond buying program could continue to mid-2014.
Similarly, CMBS traders are seeing stabilization of spreads from recent CMBS deals. For example, benchmark bonds from recent CMBS issues were changing hands in the secondary market at spreads of 120-125 basis points (bp) yesterday — roughly the same as early last week, when the previous conduit issue priced. “The spreads are pretty similar. If anything, they’re 2-3 bp tighter now,” one trader said.
“The stabilization of the indexes that set borrower interest rates is resulting in consistency in new loan quotes to borrowers,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “We are seeing spreads to borrowers in the swaps-plus-275 range for a full-leverage small balance (< $10 million) conduit loan with a 10-year term, resulting in interest rates in the area of 5.5%.”
“We are recommending, however, that our clients negotiate lower interest-rate floor levels in their loan applications as market pros believe that Swap rate and/or CMBS prices will trend downward and a lower floor will allow borrowers to capture potentially lower rates,” said Sneden.