CMBS thaw to continue despite lack of conviction

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CMBS thaw to continue despite lack of conviction

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US presidential election could become a key concern, according to trader

Despite the overall sense of bullishness and confidence conveyed at Invisso's ABS East Conference, pockets of the market are still uncertain over CMBS, according to one structured products trader.

“Investors have been frustrated they missed the rally over the past year, and many now aren’t sure if they should buy or sell,” the trader said.

The trader said market participants had a “lack of conviction” on whether to be long or short on CMBS, in large part because the rally in spreads has brought them to slightly stretched levels in his view.

“There is maybe 10 to 15 CMBS market participants that actually have a directional view,” he said. “Valuations [on various CMBS bonds] are fair. They’re neither cheap nor overvalued.”

A second CMBS trader was more focused on the election. Many investors are generally dismissive of the presidential vote on November 5 but the trader said: “ask them again in about two weeks”.

“Nobody really knows what is going to happen in the markets,” he added. “That is why we have been thinning out our inventory ahead of the election, and I’m sure other trading houses on the street are doing the same thing.”

Nevertheless, investors are becoming more comfortable with CMBS, despite some uncertainty on prices.

“More investors are coming in at the margin in CMBS,” said Alan Todd, head of CMBS research at Bank of America, during an ABS East panel on Monday.

“There is a general rebound from last year’s pessimism for commercial real estate,” he added.

In particular, Todd said office CMBS was set to rally.

“This stuff [office CMBS] is super cheap,” Todd said. “Last year there were no office deals, but this year we've had six.”

“We’re also seeing some crossover funds venture into CMBS,” Todd said. “They can get a better spread pickup at a higher part of the capital stack.”

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