CMBS: Attractive Yield Opportunities in High-Quality CMBS

This Commercial Mortgage-Backed Securities sector report is excerpted from the First Quarter 2023 Fixed-Income Sector Views.

CMBS spread performance was mixed in the fourth quarter as senior bond prices diverged from subordinated bond prices. Credit spreads on the benchmark 10-year conduit AAA-rated bond tightened from 147 basis points to 130 basis points in the fourth quarter of 2022, in step with the rally in broader markets. In contrast, credit spreads on more subordinated BBB-rated bonds increased from 535 basis points to 590 basis points over the quarter. This divergence reflects ongoing investor concerns about commercial real estate (CRE) fundamentals despite improved conditions in broader credit markets.

The most recent Federal Reserve Senior Loan Officer Opinion Survey showed bank demand for CRE loans was at levels not experienced since the COVID pandemic in the third quarter of 2020, suggesting low debt supply and challenging financing conditions for weaker properties. CRE loan volumes through third quarter 2022 have fallen by 13 percent year over year as higher interest rates and secular headwinds (especially in the office sector) challenge property valuations and strategic refinancings. This lower CRE loan transaction volume has hindered new CMBS issuance. Only $8.4 billion of CMBS was issued in the fourth quarter, compared to $17.1 billion in the third quarter and $54.6 billion in the fourth quarter of 2021.

The challenges facing the CRE markets will take years to resolve. Investor outcomes differ not only by market or property type, but also within markets and property types given the location and property-specific idiosyncrasies inherent to CRE. CMBS investors with through-cycle discipline and security selection capability will continue to see opportunities to source historically high spreads and yields in well-enhanced credit. We continue to favor select CMBS transactions backed by quality assets with strong sponsorship and structural protections, with a focus on AA to BBB- rated single asset-single borrower (SASB) and CRE-CLO securities—the latter recently offered yields in the 7.0–8.5 percent range in secondary market trading.

—By Tom Nash and Hongli Yang

Important Notices and Disclosures

This material is distributed or presented for informational or educational purposes only and should not be considered a recommendation of any particular security, strategy or investment product, or as investing advice of any kind. This material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. The content contained herein is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax and/or legal professional regarding your specific situation.

This material contains opinions of the authors, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward-looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information.

Investing involves risk, including the possible loss of principal. Investments in fixed-income instruments are subject to the possibility that interest rates could rise, causing their values to decline. High yield and unrated debt securities are at a greater risk of default than investment grade bonds and may be less liquid, which may increase volatility. Investors in asset-backed securities, including mortgage-backed securities and collateralized loan obligations (“CLOs”), generally receive payments that are part interest and part return of principal. These payments may vary based on the rate loans are repaid. Some asset-backed securities may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity and valuation risk. CLOs bear similar risks to investing in loans directly, such as credit, interest rate, counterparty, prepayment, liquidity, and valuation risks. Loans are often below investment grade, may be unrated, and typically offer a fixed or floating interest rate.

Guggenheim Investments represents the following affiliated investment management businesses: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Partners Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited, Guggenheim Partners Japan Limited, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management.

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