- Agency CMBS Trading Spreads tightened significantly in November, reaching multiyear tights
- New issuance Agency CMBS is down year over year, curbed by high treasury rates
- Imbalance of supply and demand continues to drive spreads tighter
Agency commercial mortgage-backed securities (CMBS) trading spreads are currently at multiyear tight levels; spreads have gapped tighter in November as the market has embraced a risk-on appetite for bonds. Following spread-widening to start the fourth quarter, current MBS levels on 10-year Fannie Mae Delegated Underwriting and Servicing (FNMA DUS) and Freddie Mac K-A2 bonds have reversed course and are currently the tightest seen since February of 2022. Ginnie Mae (GNMA) 223f trading spreads tightened even more significantly than government-sponsored enterprise (GSE) spreads over the course of the month and are now at their tightest level since the regional banking crisis of March 2023. This year’s tightening has been driven by an imbalance of supply and demand, with new issuance for Fannie Mae DUS and Ginnie Mae MBS down significantly year over year, while demand from end accounts is driving spreads tighter.
GNMA project loan spreads have been the darling of the recent tightening cycle; spreads have tightened 12 bps over the course of the month, and nearly 25 bps since the start of the quarter. The supply of new-issuance GNMA loans continues to be low, as high treasury rates make financing deals challenging. The curbed supply has caused the frequency and size of GNMA securitizations to shrink; the count and size of securitizations is at a decade low. With the regional banking crisis finally in the rearview mirror, demand for these securitizations has begun to return to the market. This increased demand, paired with a very low supply of new issuance, has helped drive spreads tighter. Smaller deals of around $10 million that provide diversification without unduly adding size to a securitization as well as deals that utilize a buydown are trading the best, but demand is still strong for larger deals, as undersupply issues remain. Construction loan spreads have followed suit with the tightening of project loan spreads and are generically 35-40 bps wider than a standard project loan.
The past three months have been volatile for FNMA DUS spreads; volatility has been predominantly driven by fluctuations in volume. As the 10-year treasury rate dipped in mid-September to year-to-date (YTD) lows, volume soared. Berkadia’s trading desk tracked over $1 billion in new origination per week in September, and it projects that a vast majority of these bonds will be reflected in the November Fannie Mae issuance number. As this volume saturated the market, spreads gapped wider. This trend was short-lived however, as treasury rates rose over 90 bps from their September lows, and volume flow was trimmed. Weekly new issuance numbers now resemble where they were in the first half of this year.
FNMA DUS has been trading well across tenors, as five-year through 10-year spreads have all tightened in tandem. The rare, longer-term 12-year and 15-year deals trade extraordinarily well in the market, with end accounts jumping on the opportunity to purchase longer-duration paper. Deals that utilize a rate buydown are seeing strong market execution, as buyers are more amenable to the lower coupon and can save an extra couple of basis points on the MBS beyond the buydown cost. Loans with a full-term interest-only structure are also saving on the MBS due to strong market demand. With Treasuries seemingly range-bound at current levels, this should position Fannie and Freddie for continued tightening into year-end.
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