Yields on bonds backed by shopping malls, hotels, office buildings and apartment complexes rose relative to benchmark interest rates as investors wait for the second round of the Federal Reserve's program to jump-start lending.
The spread on a commercial mortgage security rose a full percentage point during the week that ended Thursday, to 6.3 percentage points more than the benchmark swap rate, according to data from JPMorgan Chase & Co.
Investors and Wall Street banks had been gobbling up the bonds as the Fed's program to stimulate new lending promises to boost returns by financing purchases of triple-A-rated commercial mortgage debt.
The Fed effort pushed prices up quickly, and buyers could be pulling away as the commercial mortgage market remains under pressure, according to Lisa Pendergast, a strategist at Jefferies & Co. in Stamford, Conn.
Maguire Properties Inc., the largest office landlord in downtown Los Angeles, announced Aug. 10 that it planned to surrender control of seven buildings to its lenders.
The mortgages on six of them had been bundled and sold as bonds.
"Maguire should have been a wake-up call for anybody that got lulled into comfort," Pendergast said. "No sophisticated borrower is going to continue to feed a property for very long knowing that their assets are far out of the money."
Last month the Fed began lending against so-called legacy commercial mortgage-backed securities — those sold before Jan. 1. — through its Term Asset-Backed Securities Loan Facility.
Investors sought $669 million in loans to purchase older bonds backed by commercial real estate last month.
The amount of loan requests should increase as investors get more comfortable with the program's mechanics, according to a report from Barclays Capital published Thursday.
The next deadline for investors to apply for loans to buy the older bonds is Aug. 20.
The Fed has reserved the right to reject loan requests if the bond to be used as collateral is deemed too risky. The central bank threw out one bond and accepted 35 in July.
Top-ranked commercial mortgage-backed securities have gained 10.17% since July 1, according to Merrill Lynch & Co. indexes.
Last week's sell-off should be seen as a "momentary setback," Citigroup Inc. analysts led by Darrell Wheeler in New York said in a report published Friday.
The U.S. Public Private Investment Partnership, a separate government program that will lend against a broader swath of commercial mortgage securities, should push prices up further once the program gets off the ground, the Citi analysts said.
