U.S. commercial mortgage-backed bond yields soar

By Al Yoon

NEW YORK, Nov 14 (Reuters) - Yield premiums on bonds backed by office buildings, stores and hotels soared to record highs this week as concerns about economic growth and doused hopes for a federal asset purchase program plagued the market.

Traders quoted spreads on some commercial mortgage-backed securities more than 8 percentage points over key benchmarks, pushing yields above 12 percent. Spreads on top-rated CMBS last week reached 6.35 points, according to JPMorgan Chase & Co.

Risk premiums extended increases as U.S. Treasury Secretary Henry Paulson on Wednesday said a $700 billion rescue plan would be geared toward providing banks with equity, rather than using it as a fund to take illiquid mortgage assets off bank balance sheets. Banks laden with even highly rated securities have also had to sell as they reduce debt.

"It seems that those awaiting Treasury-provided liquidity have thrown up their hands and have tried to sell into a void," said Chris Sullivan, chief investment officer at the United Nations Federal Credit Union in New York.

But investors are also backing away from bonds backed by commercial mortgages amid signs of rising unemployment and softer consumer spending, which are beginning to fuel faster delinquencies on properties with loans supported by office rents and retail stores.

Sales at U.S. retailers suffered a record decline in October as fears of recession sapped spending, the Commerce Department said on Friday. See: [ID:nN14423234].

Commercial mortgage delinquencies have risen about 13 basis points over the last two months to about 0.64 percent, a rate that is low from a historical perspective but expected to rise more, analysts at Citigroup Inc. wrote in a recent report.

"Credit is going to deteriorate in CMBS, but the problem is not nearly as big" as in home loans, said Malcolm Polley, chief investment officer at Stewart Capital Advisors in Indiana, Pennsylvania. "The market is painting all CMBS with the same brush," he said.

Fear that yields will rise more has kept buyers away even if analysis suggests cash losses are unlikely, he said.

Bargain-hunting has been dangerous. Yield spreads on CMBS are eight times the levels at the start of the year.

Lower investor demand has choked off funding for new commercial loan originations, which fell 53 percent last quarter from a year earlier, the Mortgage Bankers Association said this week. The lack of financing is expected to add to delinquencies in 2009 and 2010 as loans made under lax standards begin to mature.

"The need among investor groups to conserve capital, and the uncertainty of how the slowing economy will affect property fundamentals, is fueling a prolonged pause in all aspects of commercial real estate activity," Jamie Woodwell, a research executive at the MBA, said in a statement.

Yield spreads indicated by the CMBX derivatives indexes have nearly doubled on the week. The spread for bonds measured by the CMBX-5 "AAA" index jumped about 50 basis points on Friday alone to 425 basis points, according to a midday quote. (Editing by James Dalgleish)