Markit CMBX

Look what happened to the CMBX today! After climbing to a height of 275 a few days ago, it is now down to 150. Basically this means that the spread on triple AAA commercial real estate bonds was north of 2.75% over the risk free rate but now only has a risk premium of 1.5%. As an indicator of risk, this would mean that the risk of default has just been cut in half. Half as many commercial defaults are predicted.

But how realistic is this?

The actual number of commercial defaults is at an historical low. Are the bond prices falling because they have a lower expected return? Or are the prices falling because there are no buyers? And what about speculation: is short selling having an influence?

An article in the Economist suggests that the CMBX and other indexes may be overly sensitive to downward distortion.

And why did CMBX so dramatically improve?

There are two pieces of news that influenced this. First, the offer for Bear Stearns was increased from $2 per share to $10, which would suggest that there is still some value in some of their financial assets. The other piece of news was that housing sales in the U.S. had risen slightly in February - even if prices had continued to fall.

The market does not seem to be behaving rationally. "Psychology has now overwhelmed economics," wrote Alan Blinder, former Fed vice-chair, in the Washington Post.