* Volatility cuts new cash bond supply
By Joy Wiltermuth
NEW YORK, April 22 (IFR) - Asset managers are increasingly
buying derivatives to get exposure to the commercial mortgage
bond market as cash bond supply has plunged in recent months due
to market volatility.
Outstanding gross notional of derivative CMBX contracts have
grown by US$40bn from a year ago to US$181bn as of April 15,
according to data from the Depository Trust & Clearing
Volumes have jumped as dealers hedged their exposure to a
rough market, and money managers selectively bought synthetic
indices as a substitute to cash bonds.
Synthetic indices, in theory, offer investors a seamless way
to trade notes that reference a basket of existing CMBS, but
without the headache of finding cash bonds, at an agreeable
price, through a dealer.
The most recent CMBX 9 series, for example, offers investors
exposure to 25 different CMBS sold by banks in 2015.
Cash bonds, however, are tied only to the loans securitized
by banks in a single deal.
With investors increasingly wary of buying cash bonds
exposed to aggressively underwritten loans, a synthetic exposure
to a wider group of CMBS has come into vogue as an investment
alternative in volatile markets.
"Bonds available in the cash market may not be the bonds you
like," said Michael Canter, head of securitized assets at
"You can take on CMBX quite easily until you find the CMBS
Colin McBurnette, a portfolio manager at Angel Oak Capital
Advisors, said increased buying of CMBX was also because real
money investors were "tired of varying liquidity and
idiosyncratic risks in CMBS."
SLASHED BOND STASHES
Liquidity in CMBS bonds has fallen drastically as
volatility, cuts to staff at trading desks and tough new capital
rules curbed the ability of large banks to trade.
Primary dealer inventory of CMBS has shrunk to US$6.5bn as
of April 6 from US$10bn in mid-April 2015, according to data
from the Federal Reserve Bank of New York.
And while a three-year bull-market run created nearly
US$300bn of fresh CMBS supply, deal flow recently has melted
away and there is little hope that this situation will improve.
Deutsche Bank data shows that new conduit issuance has
fallen 27% year-to-date versus 2015 to US$12.1bn.
Jittery markets also have made it difficult for lenders to
quote new commercial real estate loans when cash bonds have
dramatically sold off.
Spreads doubled on new 10-year Triple A rated securities in
February to a 12-month high of 166bp over swaps from a low of
83bp in May, according to Wells Fargo data.
In early March, Triple B minus bonds jumped to a dramatic
825bp over swaps, only to bounce back, to about 600bp, on other
CMBS paper a few weeks later.
"It just points to the liquidity problem in CMBS, which is
not getting better anytime soon," said one CMBS specialist.
NOT WITHOUT RISK
Some asset managers, however, are cautious about using CMBX.
David Fishman, a portfolio manager at Amherst Capital
Management, said his firm includes it in a limited subset of
accounts that do not bar derivatives, noting the problems
plaguing the cash market also affect synthetics.
"More desks are being shut down, which means less activity
in cash (CMBS) and less of a need on the CMBX side too," he
"And while non-dealers may be increasing participation, the
indices are still skewed to the dealers, which makes them pretty
Other large money managers like TCW, Loomis Sayles and
Invesco told IFR that they currently are not using CMBX.
(Reporting by Joy Wiltermuth; editing by Shankar Ramakrishnan
and Alex Chambers)