I got tipped to check something this evening; a little birdie landed on my shoulder and chirped in my ear, and there was a comment left on one of my other posts that piqued my curiosity. You know, when there's this birdie chirping away and then you see a comment that makes you say "hmmm.... is it too late to work on this, or should I look", well, you know you're not gonna be able to sleep until you take care of it.

So off I went to do the birdie's bidding, and when I did, I kinda sat there for a minute, wondering if I had some Peyote for dinner by accident.

Came to the conclusion that I didn't.....

Anyway, here is what the birdie told me to look at:



And then, having been clued in, I started clicking around a bit more..... and saw...



and finally



Oh boy........

That'd be BB, BBB, A and AA paper, as noted. The only relatively-unaffected paper is the AAA.

For the uninitiated, I'll do a quick explanation of this. The "spread" is basically the perceived risk. That is, if you hold such a bond and want to unload it, the spread is what someone else is going to insist you give them (off the face) for them to take it from you. One good way to think of it is that the spread (its in basis points - hundredths of a percent) goes higher as the market perceives that the risk of you defaulting on that bond goes up.

It also is a good indication of what you might be expected to give up if you sold a new bond of that same credit grade into the market on a given date, although that's not totally accurate, since these tranches of debt, when issued, are of course different than the one you intend to offer.

If spreads expand between the time you make a loan and successfully put it upon the market as a bond (after having securitized it), you lose money, because you priced the loan at the lower spread and now you're forced to eat the higher.

This sort of "spread expansion" is exactly what happened in the residential mortgage-backed marketplace not so long ago...... and is where those pretty mortgage company losses came from this last quarter.

Now you'll have to go to the source site to see the coupon rates on these, but the gist of this deterioration is that significant amounts of interest payments have effectively been detonated, because the market has devalued these bonds. The degradation is particularly sharp the last few days........ does someone know something?

Oh, and I almost forgot to mention - this isn't residential mortgage bonds - its commercial construction (mortgage) bonds. Condo developments, office buildings, that sort of stuff.

You know - the other shoe? The one that hasn't dropped yet?

This is an extremely sharp spike over the last few days. Now today the A and BBB paper recovered some of the spread. But the AA and BB paper did not.

It would probably be a good idea to pay close attention to this the next few days.

If this is a one-day (or two day) spike caused by something odd, ok. But if this deterioration is maintained.... well.... let's just say that the bond markets tend to have guys in them that are much smarter than the equities markets do.

We'll leave it at that.... for now.....

One final thought - and blatantly stolen from another blog, paraphrased (sorry, can't remember which one or I'd link it) - the economy, boiled down into a nutshell:

"You can boil it down to one element, in the end - how easy - or hard - is it for you to borrow money."

Maybe a bit oversimplified, but, as with all such chestnuts, there's more than a bit of a kernel of truth to it.

Labels: cmbs, credit spreads, spreads