Commercial mortgage securities stand to benefit most from QE2
Commercial mortgage-backed securities stand to benefit the most from the Federal Reserve's decision to purchase another $600 billion of Treasury securities, according to analysts. Bank of America/Merrill Lynch recommends investors remain overweight in CMBS and "move deeper down the capital structure to the AA/A level for yield and price return." Following its meeting the first week of November, the Federal Open Market Committee announced plans to begin another round of purchasing Treasuries "to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate" of maximum employment and price stability. The Fed plans to acquire $600 billion of the longer-term securities. "The Fed's Treasury duration target almost exactly matches that of the CMBS market, implying that CMBS most directly benefits from the crowding out of Treasuries caused by QE2," analysts said. "In addition, since CMBS is in effect directly levered to the Fed’s core mission, lowering unemployment, it is as if the Fed is directly targeting a rise in CMBS prices." BofAML also said capitalization rates are likely to move lower in conjunction with the drop in rates that is expected as the Fed makes its purchases further supporting CMBS. Meanwhile, JPMorgan analysts "believe the 'reach for yield' in fixed income will not fully extend to all non-agency sectors." "We continue to think prime fixed rate will have more upside from QE2 given its carry, and expect that more institutional investors will use prime fixed RMBS for yield pick up versus corporates," according to JPMorgan. The analysts said Greenpoint, American Home, and WaMu-serviced option adjustable-rate mortgages fared significantly better than Countrywide and Structured Asset Mortgage Investments option-ARM senior bonds and bond selection will be more critical next year. "In fixed-rate paper, it was even less about the servicer and more about collateral composition," the analysts said. "Picking better structure, servicers, geographic locale, LTV distribution and digging into the potential for borrower improvement (% always current) are just some of the themes that will continue to ring true in 2011." Write to Jason Philyaw.