An index tracking derivatives linked to US commercial mortgages suggests a grim outlook for the country’s commercial property sector.
The risk premiums, or spreads, on the CMBX index have jumped as a number of macro hedge funds made large bets that the $850bn US commercial mortgage market would see problems.
They do so by shorting the CMBX index, or buying protection against default on bonds that they do not own, with the view that the commercial real estate market could face problems similar to those of the residential market.
The CMBX index references the 25 most traded commercial mortgage-backed bonds.
The value of the index, which is quoted in spread rather than price, reflects how likely investors expect the underlying deals to pay principal and interest.
One investor, Andrew Lahde, of Lahde Capital, insists defaults are going to rise significantly, driven in part by looser underwriting standards.
“If God comes down and miraculously fixes everything that is going to drive us into a deep recession, we probably still would not lose money on the CMBX trades,” Mr Lahde said at the launch of a fund called Commercial Real Estate Hedge.
Yield spreads on the BBB- tranche have jumped almost 50 per cent in the past month, reaching a record high of 944.69 basis points on Monday, suggesting that investors expect more defaults among the underlying deals. Some analysts say this is not supported by fundamentals.
“The performance of the index in no way reflects the state of the commercial mortgage market,” said Christopher Sullivan, chief investment officer at the United Nations’ employees federal credit union in New York.
“Fundamentals in the market would have to deteriorate quite a bit further than anyone would imagine now.”
To date, actual losses in the CMBX indices have been negligible. Sixty-day loan delinquencies on a previous version of the index, which has traded since April, stand at just 0.2 per cent, according to Bank of America.
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