Demand is rising for riskier junior bonds backed by commercial mortgages as the U.S. economy improves, according to Bank of America Corp. analysts.
The "quick and dramatic" rally in the most-senior bonds backed by shopping mall, hotel and skyscraper loans has extended to securities that were originally rated triple-A, though with less of a cushion insulating investors from defaults, B of A analysts led by Roger Lehman said in an April 9 report.
Interest in the junior bonds, many of which have had their ratings cut, was "very aggressive" last week, the analysts said. One security rose to more than 81 cents on the dollar, up at least 5.5 percentage points from "a few weeks ago," according to B of A.
The rapid gains mean there are "better relative value opportunities" elsewhere in the market, the analysts said.
"This sector has tightened too far, too fast."
The gap, or spread, on a top-ranked commercial mortgage-backed security commonly cited as a market barometer narrowed 0.30 percentage point to 3.45 percentage points more than the benchmark swap rate last week, according to B of A data. A month ago, the debt was at 4.40 percentage points over swaps, the data shows. Spreads fall as bond prices rise.
Late payments on mortgages bundled and sold as bonds rose 85 basis points to 7.14% last month, according to Fitch Inc.
