The CMBS market, where mortgages based on commercial paper office and retail space are traded, has been extremely quiet of late. Good prices are hard to find, but what's clear is that the primary market has all but disappeared, and that volumes in general have been low.

Jonathan Keehner of Reuters picks up on some ominous news, however: Wall Street seems to have decided that the first quarter of 2008 is an excellent time to flood the market with $20 billion of brand-new CMBS issuance. And not just any old CMBS issuance, either: these issues are LBO-related CMBS issuance, which means they're designed to help pay for big leveraged buyouts which were closed in 2007.

If all these deals end up being issued, the entire CMBS market could be severely damaged. There's absolutely no indication whatsoever that the market has any appetite for $20 billion of new commercial mortgage bonds - but, at the same time, the banks doing these deals are extremely motivated sellers, and are likely to be quite happy to sell at loss to themselves.

Anybody holding CMBS today, then, might do well to start selling, since there will be new issuance some time this quarter which is likely to come significantly below today's market level.

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Felix Salmon

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