The Fed announced Tuesday that previously issued (legacy) commercial mortgage-backed securities (CMBS) will become eligible collateral for the Term Asset-Backed Securities Loan Facility (TALF). This comes less than three weeks after announcing that only newly issued CMBS would become TALF-eligible.
The mission of the TALF is to increase credit availability. So how does expanding TALF-eligible collateral to include legacy CMBS help the Fed achieve this goal? High yields on legacy CMBS discourage the extension of new credit towards the purchase of commercial property. From the perspective of a lender, owning senior CMBS arguably provides a safer exposure to commercial real estate than new loan extensions, while at the same time, delivers a yield well in excess of what could reasonably be obtained in the market for new credit extensions.
As of last Friday, the yield on TALF-eligible CMBS securities was 684 basis points above the 10-year Treasury rate. (This implies a yield near 10%.) By making legacy CMBS securities TALF-eligible, the Fed hoped to spur demand for these securities, and as a result, decrease their yield spread. A week later and three days after the Fed’s announcement, the spread on TALF-eligible legacy CMBS has narrowed to 495 basis points. This suggests that the Fed’s announcement has helped narrow spreads.