CMBS Credit Spreads: How They Work
A CMBS credit spread is defined as the difference in yield between a U.S. treasury bond and a specific commercial mortgage backed security. The least risky CMBS securities have a lower credit spread, since they do not need to offer higher rates to attract investors, while riskier securities offer higher rates to compensate investors for their increased risk. For CMBS loan borrowers, a larger credit spread often means a higher interest rate.
What are the Factors that Influence CMBS Credit Spreads?
A variety of factors can affect CMBS credit spreads, and, as a result, CMBS loan interest rates. These include:
Inflation: Changes in inflation can affect market-wide supply and demand, which can have a trickle-down effect on CMBS loan rates/spreads.
Economic Uncertainty: If the economy begins to falter, investors may begin to flock to U.S. treasury bonds, driving down their rates, and therefore increasing the difference between treasury bond and CMBS yields.
Bond maturity: Credit spreads are typically larger for bonds that have longer maturities, as this increases the amount of risk for potential borrowers.
Quality/rating: Commercial mortgage backed securities composed of loans taken out by higher risk borrowers will naturally have a larger credit spread than those composed of lower-risk loans.