The CMBS crash | FT Alphaville

The CMBS crash

The graphs really say it all.

From Markit, below, are a selection of graphs showing the performance of the CMBX index. The CMBX in an index of CDS written against commercial mortgage-backed bonds. Thus the higher the spread on the CMBS, the lower the implied value of the underlying bonds.

As you can see, CMBS have plummeted across the board.

Note also that some of the steepest declines have been for the triple-A rated tranches. All correlations go to 1, etc. etc.

The proximate cause of the pain was the disclosure last week that the TARP would no longer be used to buy up illiquid securities from the banks. CMBS being foremost among those securities eligible.

As Across the Curve observes:

Meltdown. That is the word that one market participant used to describe the action in the CMBS market today…

Quoth the Buffalo Springfield circa 1966,” Something’s happening here and what it aint exactly clear”. It feels as though the bond markets are setting up for another patch of very rough weather.

Of course, for the banks, this now raises the distinct possibility of some severe writedowns (worth reading: exposure of UK banks to CMBS).

One final question: is this crash driven by technical factors and therefore, potentially, overplayed? Possibly, but it’s worth observing what has happened to the sister index of the CMBX, the ABX, (which tracks implied prices on subprime mortgage-backed bonds.) The ABX has never recovered from its lows. It has just drifted lower. The news about the economy has worsened, and delinquencies on subprime mortgages have continued to tick higher.

The WSJ notes the rising number of commercial mortgage delinquencies.

…defaults on commercial mortgages are starting to rise. According to a Citigroup Inc. report, the overall number of commercial mortgages packaged into securities that are 30 days or more past due rose to 0.64% in October from 0.39% at the end of last year, with most of the increase coming in October. The latest figure, though low by historic standards, marked the highest delinquency rate in two years.

Now Commercial-mortgage-backed securities are different fish to residential-backed bonds: the pools are far less granular. Which goes some way to explaining those apparently low delinquency rates. With CMBS, when trouble does hit, it is much more sudden and sharp. The delinquency rate might not be expected to smoothly move higher, it should jump. And it will do so when the real pain begins to bite in the economy.

But from just a glance at the major metropolitan areas right now it should be clear the outlook for commercial property is not good. Overvalued and oversupplied.

From Markit:

Series 5 AAA:


Series 5 junior AAA:


Series 5 AA:

Series 5 BB:


Related link:
The commercial real estate risk list – FT Alphaville