Despite an ostensibly strong showing in previous years, commercial mortgage-backed securities (CMBS) are starting to lose their strength.
Sddt.com reports that after an incredible return of 11.4% to CMBS investors in 2014, a return better than several other investments such as junk bonds and treasuries, the first half of this year saw a dismal CMBS return.
JPMorgan Chase and Co. and Barclays Plc index found the securities fell 1.84% in June, a dip that caught many investors off-guard.
CMBS are bonds tied to commercial real estate properties, such as apartment buildings and shopping malls. Some financial experts are concerned that the CMBSs are dipping due to poor underwriting standards.
For their part, borrowers are trying to acquire cheap debt now, since the Federal Reserve is planning to increase interest rates for the first time since 2006, causing the sale of private-label securities to increase by 31% since last year to $50 billion, according to Morgan Stanley.
A July 8th report by Wells Fargo and Co. casts doubt on the sustainability of CMBSs.
“The picture is unlikely to improve soon,” the report reads as lead by Chris van Heerden.
The report also noted that CMBSs aren’t doing so well, considering they are usually issued with 10-year terms, which makes them more vulnerable when interest rates go up compared to investments with shorter terms.
Of the CMBS deals in most trouble are those with ties to commercial real estate with poor credit outlooks and modestly priced appreciations.
In addition, the debt tied to CMBSs sold last year have posted three-month delinquencies three times higher than the same bonds issued in 2013, according to Bloomberg.
CMBSs issued in 2014 with the lowest investment-grade ranking BBB-minus yielded a 2% decline through June. The same bonds sold two years before that yielded gains of 2%.
Co-portfolio manager of the investment firm MatlinPatterson Global Advisers Marc Rosenthal claims that CMBSs are “just not working today.”
Still, CMBS bonds are very prominent in the United States. From 2014 to 2017, more than 11,000 CMBS loans will mature.