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Real Estate Bonds More Attractive to Investors

The two-year swap spread narrowed 1.43 basis point to 15.88 basis points, the lowest level since April 20.  Goldman Sachs and Citigroup are in the process of trying to sell their fourth CMBS package in 2010 with $788 million of debt from 48 properties as investor interest in these vehicles rekindles.  Although the Federal Reserve noted that commercial real estate is still slowing economic growth, bond investors believe that growth is strong enough for borrowers to meet debt payments.  According to Dan Castro, chief of structured finance analytics and strategy at BTIG LLC, “CMBS is an avenue that’s going to provide better returns.  There’s a lot of guys clamoring for these returns.”

Consider that corporate bond yields are only 177 basis points over Treasury, while CMBS yields are 100 bps higher.  According to Business Week, “The difference between the rate to exchange floating for fixed-interest payments and Treasury yields for two years, known as the swap spread, is a measure of investor perception of credit risk.  It serves as a benchmark for investors in many types of debt, including mortgage-backed and auto-loan securities.  The two-year swap spread narrowed 1.43 basis point to 15.88 basis points, the lowest level since April 20,” indicating increased confidence.  So while CMBS still has a ways to go to get back to previous levels, the market is in recovery which is great news for the rest of the industry which relies on CMBS for refinancing.

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