(Update 1: Clarifies spread definition.) Commercial mortgage-backed securities (CMBS) spreads are tightening this week, indicating greater demand of CMBS bonds. Spreads are the difference in yield between a bond and its benchmark (here the swap rate). Ten-year triple-A spreads finished 15 to 25 bps tighter on Wednesday alone after news of changed tax rules applying to commercial loans within securities, according to CMBS and commercial mortgage information provider Trepp. Previous tax rules imposed penalties for changes made to commercial mortgage pools after their inclusion in a securitization vehicle, posing a disincentive to modifying commercial real estate loans within CMBS. New rules issued Wednesday by the International Revenue Service (IRS) and US Treasury Department permit in certain cases the modification of commercial mortgages within real estate mortgage investment conduits (REMICs) without tax penalty. “In the past, such discussions had the potential to trigger tax events,” Trepp said in commentary Thursday. “The market, sensing this ruling might stem the rising tide of delinquent loans, bid the market up.” The new rules, which effectively lift a modification disincentive and indicate borrowers and servicers may soon proactively pursue modification options, comes at a time when performance of CMBS remains weak. Trepp on Wednesday noted reports of “imminent default” on the $100m Orchard at Saddleback loan, which moved to a special servicer. The loan represents nearly 2% of an ’07-vintage JP Morgan security, with the occupancy on the property slipping to 86% at year-end 2008 from 94% at securitization. The firm said the borrower of the Orchard loan gave notice it does not intend to fund future shortfalls in monthly cash flow. Write to Diana Golobay.