Institutional-Quality Loan Returns Increase

Institutional-grade commercial loans returned 2.11 percent in the second quarter, up from 2.01 percent in first-quarter 2017, the Giliberto-Levy Commercial Mortgage Performance Index reported.

John B. Levy & Co., Richmond, Va., publishes the index, which tracks private-market loans held in investor portfolios.

Quarterly income accounted for a 1.11 percent return and capital value produced 1.01 percent of the total return, the firm said. Other factors led to a -0.04 percent contribution.

That means investment performance is off to a strong start in 2017 with a 4.16 percent year-to-date total return, the firm said.

“Multiple factors came into play to drive commercial mortgage investment returns in the second quarter,” said John B. Levy & Co. President John Levy, who created the G-L Index with Michael Giliberto. “Differences in treasury yields, a decrease in term premiums for shorter mortgages and the continued decline in credit spreads all contributed to the second-quarter Giliberto-Levy Index results.”

Levy noted some differences between three-year and five-year Treasury yields. “First, some Treasury yields moved up and some headed down,” he said, noting that the smallest changes in absolute value were a five-basis-point increase in the three-year yield and a four-basis-point decrease in the five-year yield. 

“At shorter maturities increases were higher; at longer maturities decreases were greater,” Levy said. “As a result, the slope of the yield curve became flatter.”

These changes most likely reflect actual and anticipated changes in policy rates set by the Federal Reserve Board, Levy said.

There was also a “notable” decrease in term premiums and a continued decline in credit spreads, the firm said. The yield curve flattening appeared to underpin a notable decrease in term premiums embedded in credit spreads for shorter-term commercial mortgages. The three-year premium decreased 35 basis points to 40 basis points and the five-year premium dropped from 40 basis points to 10 basis points.

Finally, credit spreads continued to decline. The Giliberto-Levy Commercial Mortgage Performance Index composite of major sectors registered an 11 basis point decline. The most recent high for credit spreads was nearly 200 basis points in mid-2016, when Treasury yields reached historic lows. Since then, spreads have come down roughly 40 basis points. These factors combined to produce the index’s 1.05 percent price return. 

“The Giliberto-Levy Index’s performance against investment-grade fixed-income sectors was again favorable,” Michael Giliberto said. The Giliberto-Levy Index beat the 1.35 percent total return generated by commercial mortgage-backed securities as measured by the Bloomberg Barclays Index.