Commercial mortgage-backed bonds are rallying as the Federal Reserve ends support for the $700 billion market, showing growing confidence that loan defaults will not derail the economic recovery.

The securities, derived from debt on skyscrapers, shopping malls and hotels, returned 7.41% through March 12, compared with 2.55% in the fourth quarter, according to a Barclays Capital index.

Top-rated securities are yielding about 3.03 percentage points more than Treasuries, their lowest spread since August 2008, according to Morgan Stanley.

Total returns are accelerating as the Fed winds down its Term Asset-Backed Securities Loan Facility, or Talf, to buy older debt. The jobless rate is holding at 9.7%, indicating employment may be stabilizing. Bond prices were hurt during the credit crisis, but even in "pretty upsetting" scenarios, the safest debt is not likely to lose money, said Scott Simon of Pacific Investment Management Co.

"CMBS has been doing well on its own, and it's not on the back of Talf," said Simon, a managing director and the head of mortgage- and asset-backed securities at Pimco in Newport Beach, Calif. "The program had more of a psychological impact rather than brute force."

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