U.S. Commercial property bonds have worst month in Feb
Written on March 5, 2008
Bonds backed by U.S. office buildings and hotels suffered their worst month ever in February as investors girded for falling property prices and rising defaults, according to Lehman Brothers.
Commercial mortgage-backed securities lagged benchmark U.S. Treasuries by a record amount in February, even underperforming the asset class that includes bonds backed by risky subprime mortgages, according to indexes compiled by Lehman Brothers Holdings Inc.
CMBS lost 3.74 percent in February, or 5.23 percentage points behind U.S. government debt, the indexes show. Asset-backed securities lost 1.38 percent, while mortgage bonds guaranteed by government-sponsored enterprises gained 0.2 percent, they said.
Rising delinquencies in commercial real estate has prompted investors, already burned by flare-ups in residential real estate, to flee the $750 billion market that funds office buildings, hotels and shopping malls. Forecasts of a 20 percent drop in commercial property values by Moody’s Investors Service and underwriter JPMorgan Chase & Co. have fueled a frenzy of selling in derivative indexes that continued on Tuesday.
There is “an underlying and pervasive unease with securitizations of all manner, and the real risk that increasing recession probabilities will adversely affect commercial property values, cashflow levels, and rents,” said Christopher Sullivan, chief investment officer at the United Nations Federal Credit Union in New York.
Investors will probably demand higher and higher yields in anticipation of a worsening outlook for commercial property due to tight credit conditions, he said.
Renewed jitters were poised to send an index of CMBS to record levels on Tuesday.
The highest-rated portion of the CMBX derivative index was offered at yield spreads at 235 basis points over interest-rate swaps at mid-morning, compared with a record close of 228 basis points a few weeks ago, a dealer said low fee cash advance. Spreads had narrowed last month as investors considered the selling overdone in a market that few expect to match the debacle seen in subprime loans.
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