CMBS spreads halve in a year

Credit markets continue to rally, further emboldened by ECB actions last week, according to bank analysts.

CMBS senior credit spreads have halved in the past year, while junior spreads have contracted three-fold, according to Bank of America Merrill Lynch’s (BoAML) latest structured finance weekly report.

Actions from the European Central Bank (ECB) last week have contributed further to the rally, BoAML's credit analysts said.

Rate cuts, targeted LTROs (Longer-Term Refinancing Operations), and an asset purchase programme combined with hints of a possible ABS purchase programme, “drove market sentiment this [last] week and added further fuel to the rally in peripheral Europe,” the analysts said.

Broadly speaking, credit spreads tightened by roughly 10-25 basis points at all points in the CMBS capital stack this week, they said. Discount margins on legacy CMBS are now roughly 110 bps over Libor on first pay tranches, 160 bps on second pay tranches, 185 bps on third pay and 300 bps on fourth pay. This compares to equivalent figures of 225 bps, 325 bps, 550 bps and 1000 bps respectively last year.

“CMBS spreads have not been this tight since January / February 2008, according to our records,” the analysts said.

BoAML also noted that the more favourable conditions could result in a fresh wave of CMBS transactions hitting the market. Its reported a new €355 million Italian CMBS from Deutsche Bank called DECO 14-Gondola is expected to close by early July. The possibility of another five transactions destined for the European CMBS pipeline were highlighted by PDI's sister publication Real Estate Capital last week. 

In the other fixed income markets, yields on European sovereign debt hit multi-century lows on the back of ECB president Draghi’s actions, according to Deutsche Bank macro analysis on Monday morning.

“Draghi has certainly made a huge impact on financial markets as Friday saw some landmark levels hit across different assets. Many European bond markets hit yield lows with quite a few hitting fresh multi-century all-time lows and many others flirting close to them,” the bank’s credit strategists said.

Amongst the highlights, 10 year French yields hit an intra-day level of 1.654 percent – an all-time low on DB’s records going back to 1746; 10 year Spanish also hit an all-time low on data going back to 1789 and in Italy, yields have only ever been lower for a few months in early 1945, on data going back to 1808.

They also noted that trading levels on the credit default swap index iTraxx Financial Senior was getting close to the iTraxx Main index.

“It’s quite clear that credit investors have increasingly taken comfort that financials are getting safer and safer with regulation and with the still extreme levels of intervention/liquidity,” the analysts said.

However, the same trend was not evident in the equivalent equity indices DJ Stoxx 600 and DJ Stoxx 600 Banks, they added.