The Federal Reserve's decision this week to reject five commercial mortgage bonds as collateral for loans under its Term Asset-Backed Securities Loan Facility program has created confusion and uncertainty in this corner of the debt market.

This is the second time in six months that the central bank has rejected commercial mortgage-backed securities, bringing its total rejected issues to nine. Each time, the Fed has not offered any reason for declining to accept bonds that otherwise meet its criteria for acceptable collateral under the program.

"The Talf-lending market uncertainty continues as investors are left having to speculate on reasons behind the rejections each month," said Darrell Wheeler, a managing director and head of securitized research at Citigroup Inc.

Overall the Fed has accepted 190 commercial mortgage bonds under Talf, a 96.6% acceptance rate. The occasional rejections, however, make investors less confident of the process, he said, and will lead them to scale back their submissions at the next round of Talf to only supersafe bonds. In the broader context, Wheeler said, rejecting bonds without explanation limits the reach of the program to only a segment of the market and does not foster a top-to-bottom rally in commercial mortgage bonds as intended.

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