In early February, the U.S. Treasury made a statement that has not received much attention, even though what it implies regarding their thoughts on the future demand for treasury securities (and hence yields) is very interesting. The announcement was mainly about the auction of $72 billion of coupon securities, but it also said that it plans to issue a final rule on floating-rate notes in the coming months, with the first FRN auction expected to occur within the next year. The statement probably did not get a lot of attention because the Treasury has spoken about the idea of floating-rate notes earlier too. However, it had never given a specific time frame in the past. This is significant, not just because it will be first new type of treasury security to be issued since 1997, when

In 2012, the CMBS (commercial mortgage-backed securities) market had a significant rally as is evident from the table below showing bond spreads over swaps.

Not only were the spreads tighter significantly over the year, the performance was better than expectations by almost any measure. Issuance for the year was $48 Bn compared to forecast of $38 Bn. The new issue 10 year AAA spread to swaps ended at 90 compared to forecast of 140, and new issue BBB spreads ended at 410 compared to a forecast of 587 (all forecasts are averages of predictions by market participants as published in Commercial Mortgage Alert). The spread tightening was not

The iPad tablet has been a big success for Apple. Popularity of tablets is seen as partly reducing the demand for Windows laptops. As more people use non-Windows tablets, and tablets become more powerful, they could in fact become a threat to the dominance of Windows and Office Suite. Each one generates about 40% of Microsoft’s operating income, and it is important for Microsoft to defend these extremely profitable and currently

I always find it useful to start with views of market participants and historical data for some perspective. Also, for legacy deals, estimates of losses are an important element. Below are forecasts for spreads for 2007 vintage CMBS for June 2011 published by the industry’s weekly newsletter, Commercial Mortgage Alert, at the beginning of the year, along with some

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The creators of the graphic intended to make the case for active management. I am assuming that anyone managing investments for themselves or others already believes in benefit of active management to some extent. The points I want to make go a little further.

The first point is that sector selection is much more important for generating superior returns than individual security selection. You could be very active in selecting securities, but if they are not in the right sector, the returns might suffer, no matter how much effort is put

For many companies, especially REITS, banks and insurance companies, which hold large portfolios of commercial real estate properties, loans, or securities, the direction of commercial real estate markets will have a significant impact. There is significant uncertainty on the direction. So it is worthwhile to examine the views of market participants.

Predictions about future bond spreads by market participants provide a window on their thinking about their expectations regarding the performance of the underlying asset class. CMBS industry’s weekly newsletter, Commercial Mortgage Alert published its semi-annual polling of predictions on CMBS spreads six months later last month. One interesting fact in the data was that not a single person asked for their prediction thought that the spreads will be wider six months later! Does this unanimity reflect wisdom of crowds and indicates a steadily improving commercial real estate market, or is this a contrarian signal with respect to

The Reforms

Ratings agencies have been criticized heavily by many for their role in the U.S. financial crisis, in particular over conflicts of interest and their failure to recognize the high risks inherent in complex structured products. They have also been blamed for throwing fuel onto the fire of crises by belatedly and aggressively ratcheting down ratings. Numerous proposals have been put forward to reform the rating process to avoid these issues.

The US Congress, after resolving the differences between the House and senate versions last week, is on the path to pass a sweeping

So clearly, there is good demand for CMBS bonds backed by well underwritten loans. Also, borrowers clearly want loans if they can get a reasonable cost of financing. DDR loans, with about 4.25% all-in cost of financing for the borrower, showed that a low cost of financing is possible even in the current market.

Yet prospects of a conduit style multi-borrower deal seem bleak at the moment. Any CMBS deals that come to market are expected to be single-borrower deals, as in, in those deals the borrower takes the market risk and not the underwriter doing the deal. Securitization shops do not want to take the spread risk while aggregating the pool because there is no way to

This highlights the chicken-and-egg type problem that the CMBS market faces. Everyone knows that the new origination will be of higher quality and so should have tighter spreads than the legacy bonds. Yet, lacking an efficient hedge, all that the originators have for indication of spreads are the legacy bonds, which are still too wide for new issue deals. In other words, originators are looking for tighter and stable bond spreads to originate, and market is looking for new collateral for tighter spreads – sort of a chicken-and-egg type

The table below is the latest set of forecasts published. It shows predictions from ten industry participants on where recent vintage (i.e. 2006 to 2008 deals) CMBS spreads will be six months later. Some observations follow.

Let’s start with the averages. The average prediction suggests that, six months later, Super Senior AAAs will be tighter but BBB spreads will be wider. The credit curve will be steeper. That makes sense and reflects the belief of many that CMBS will face losses but not to an extent

The first step in the process is defining the problem being faced by the CRE market. It is a complex problem and yet the best description of it I have seen is a simple one sentence comment reportedly made by a panelist at a recent industry conference organized by CMSA:

“We

On Feb 10, when the Treasury Secretary Tim Geithner announced the Financial Stability Plan, which included a Public-Private Partnership Fund to remove bad assets from banks’ balance sheets, the markets reacted very negatively because of disappointment with lack of details on the plan. According to news items, the announcement of details is imminent now. Given the magnitude of reaction to the original announcement, many in the market await the plan details with interest.

That the Fed should provide financing to private investors, instead of buying toxic assets itself (to help remove these troubled assets from banks' balance sheets), is accepted by a lot more people now. By involving private capital, the government can minimize use of public funds and provide a mechanism for determination of fair prices for these toxic assets based on competitive bids by multiple private investors (my follow-up and original articles describe the reasoning).

There are already a lot of private investors who have raised significant amounts of money to invest in distressed assets. However, a lot of this cash has not been invested yet. Part of the reason is that they desire lower prices to get their returns to higher target levels than what they can get at present. Sellers, on the other hand, are often not ready to sell at even lower than current prices, especially when they