Asset Managers Buying Derivatives to Get Exposure to CMBS Market

According to a recent Reuters article, investors are turning to CMBS derivatives for liquidity as cash bond supply has sharply dropped in recent months due to market volatility. The article cites data from the Depository Trust & Clearing Corporation, which shows outstanding gross notional of derivative CMBS contracts have grown by $40 billion from a year ago to $181 billion as of April 15, 2016. As a substitute for cash bonds, money managers have selectively bought synthetic indices, which offer investors a seamless way to trade notes referencing existing CMBS without the hassle of finding cash bonds through a dealer. As stated in the article, “liquidity in CMBS bonds has fallen drastically as volatility, cuts to staff at trading desks and tough new capital rules curbed the ability of large banks to trade.”

According to the Federal Reserve Bank of New York, primary deal inventory of CMBS, which was $10 billion this time last year, has shrunk to $6.5 billion as of April 6, 2016.

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