Wednesday, October 7, 2009

CMBS improvements



This is a Bloomberg summary page of conditions in the Commercial Mortgage-backed Securities market. Note the chart in the upper left hand corner which shows a history of spreads on various types of CMBS. All spreads have been declining since last April, even as news stories of commercial real estate calamities proliferate. In the bottom right chart, note the increased issuance of CMBS this this year, versus last year—this market is coming back to life, despite all the horror stories you are hearing. The bad news is summarized in the bottom left chart, which shows huge increases in downgrades of CMBS this year. The bad news is all over the place, and unlikely to get much worse; otherwise spreads would not be contracting. And while you can bet that rating agencies are doing their utmost to downgrade things, upgrades are still higher this year than they were last year.

6 comments:

Blake Huber said...

hi Scott --

As always, thank you for sharing such important info and insights that few of us lay people have access to.

As the equity and credit markets continue their stunning and dramatic rises, I recently have come to seriously question whether the rally in equities, junk bonds, commodities, etc is all liquidity driven as opposed to driven by fundamentals. For example, it appears to me that narrowing CMBS spreads could be the result of improving fundamentals OR a liquidity driven rally into higher yielding asset classes - I can't tell the difference. Can you help? I think historically assets are positively correlated with analyst upgrades, not inversely correlated as you point out with all of the downgrades occurring this year (Please correct me if I'm wrong here).

Your comments and insights are greatly appreciated,
Blake

Michael said...

Scott... I don't have a specific comment on this post, but I do want to say that I very much appreciate your blog, and all the data that you publish every day. It is very helpful and informative. Without a doubt, your blog is on my daily stop list. Thank you much for your efforts,

Michael Meyers

PS- I don't understand why papers like the WSJ don't publish data like this on an on-going basis???

Scott Grannis said...

Michael: thanks for your comments, it's nice to be appreciated.

Scott Grannis said...

Blake: Liquidity has a role to play, certainly. But I think that role is not driven artificially by the Fed dumping money into the system (M2 has not grown by an amount that might be considered excessive), but by an increase in money velocity. Money that was hoarded is now being spent again. I think the economic fundamentals have improved enough to justify the rally that we have seen so far.

It wouldn't be surprising to see the equity market get into bubble territory, fueled by excessive money creation, but that day is still well into the future, I believe. For now I think that equities and credit spreads are still priced to a very modest, even weak, recovery. I think the market is still too cautious about the future.

Dark Space said...

Virtually all of the rally has been liquidity driven, fundamentals haven't improved. There was a period in late 2008 and early 2009 where prices reflected Armageddon scenarios and some of the change is reflected in that being a faulty, or at best, unfair, assumption.

The Issuance Numbers do not reflect new loans being done in 2009 and even in part of 2008. Other than last week's DDR TALF deal, a few small military housing deals, and agency deals, there has been NO ($0) in new US CMBS issuance. The bar chart is reflecting a few ReREMIC deals, which are just re-tranchings of CMBS deals that already existed.

Scott Grannis said...

According to Merrill Lynch, the yield on all investment-grade fixed-rate CMBS has declined from a high of about 17% to now 7.6%. Are you saying that is exclusively driven, fictiously, by liquidity and not by any improvement in the fundamentals?