- Agency CMBS spreads find stability in turbulent bond market.
- Treasury volatility continues to plague the market due to general fiscal and monetary policy uncertainty.
Agency Commercial Mortgage-Backed Securities (CMBS) spreads have tightened significantly in May, following early April widening. Strong demand for Agency CMBS paper has driven spreads to tighten to pre-Liberation Day levels across tenors. The supply of new-issue Agency CMBS has been light so far in the month of May, averaging less than half the $1.5 billion weekly run rate we’ve been experiencing recently. This dip in supply, which has likely been exacerbated by treasury rate volatility, has helped drive spreads tighter. Deals that utilize a rate buydown continue to get the best execution in the market due to their convexity profile, driving strong investor demand. Ginnie Mae (GNMA) project loan and construction loan spreads have also found stability, following significant widening in early April. While the tightening in GNMA spreads has not been as drastic as the tightening seen on Fannie Mae Delegated Underwriting and Servicing (FNMA DUS), market liquidity has improved overall.
Agency CMBS spreads widened significantly in early April, following President Trump’s “Liberation Day” tariff announcement and the general market turmoil that ensued. The widening was caused by a number of factors, including the general market volatility caused by the uncertainty surrounding fiscal policy moving forward. Spreads began to find their footing following President Trump’s mid-April announcement of a 90-day pause on reciprocal tariffs. Tightening accelerated in May as the Trump administration announced a 90-day pause on tariff negotiations with China, and volatility in the bond market continued to cool. Uncertainty surrounding fiscal policy—including any presidential tweets about the future of Fannie and Freddie—could continue to drive volatility in Agency CMBS spreads.
While 10-year Treasury yields continue to flirt with either side of 4.50% and investors consider the impact of volatility around acquisitions and dispositions, it’s worthwhile trying to frame current yields in historical context. While the pre-Global Financial Crisis (GFC) era doesn’t provide a perfect parallel to today’s environment, it is more reflective of today’s inflation pressure and monetary policy than the years following the GFC. Here, the 10-year United States Treasury (UST) also averaged out around 4.50%. Factoring in one standard deviation of that time period (2003-2008), or about 68% of the outcomes, you can see that current Treasury yields are pretty well range-bound within that band. With mounting volatility, political uncertainty, a recent credit downgrade, mercurial trade policy, and big, beautiful legislation, being range-bound at these levels feels fortunate.
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