Thursday, September 24, 2009
bid-only credit markets
[S]ingle-A rated commercial mortgage backed securities ... have more than doubled in price....
These are securities that vaporize if losses on the underlying pools exceed 30% or so, depending on structure. With defaults rising on commercial real estate, the willingness of the market to buy the lower-to-middle part of the capital structure seems foolhardy.
Dealers tell me that markets have been bid only for the last couple of weeks: no-one has anything to sell, and financial institutions have a standing bid for anything with yield. Part of the explanation for the pendulum swing is the available of Public-Private Investment Partnership money to lever up these assets, but that cannot be the only cause. The fact is that the money management industry has no choice but to stampede in whichever direction the market is moving.
High-quality credit was stupid cheap at the beginning of the year. Now it’s stupid rich.