10-Year AAA CMBS Spread to Treasuries Graph

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BOTTOM LINE: Yields on commercial-mortgage backed securities are falling substantially relative to Treasuries. The 1-year graph above is a Morgan Stanley index showing the average spread above similar Treasuries for 10-year AAA commercial-mortgage bonds. This spread dropped 27 basis points last week to 254 basis points, which was one of the largest weekly drops on record going back to 1996. Moreover, the spread has plunged 155 basis points from a high of 409 on March 14th. Spreads on AAA credit-default swaps have fallen 177 basis points since they peaked at 277 on March 10, according to Bloomberg. Most investors believed the rise in spreads didn't reflect the credit quality of the underlying loans. The recent declines in spreads reflect more rational sentiment regarding the prospects for the US economy and commercial real estate. While spreads are still high relative to historic norms, this is a significant positive.