Investment Banking

Prices of bonds backed by commercial mortgages have recently dropped to levels not seen since the early days of the pandemic, pointing to a growing economic threat stemming from office vacancies and rising interest rates, The Wall Street Journal reported. A small corner of the U.S. bond market, commercial-mortgage-backed securities (CMBS), have taken a beating for over a year owing to fears that owners of business parks, high-rises and other office properties could default on loans extended at a time of different work habits and lower financing costs. That stress only deepened after Silicon Valley Bank’s collapse, which raised concerns that regional banks might scale back their risk-taking and become more reluctant to make commercial real-estate loans — making it harder for property owners to refinance existing debt.The average extra yield, or spread, above U.S. Treasurys that investors were demanding to hold CMBS with a triple-B rating (the lowest broad investment-grade tier) — was 9.52 percentage points, according to an ICE BofA index. That was up from 7.6 percentage points at the end of February and approaching the 10.8 percentage point level reached in March 2020. The average price of the bonds has dropped to around 75 cents on the dollar from roughly 89 cents a year ago.