Pension Funds May Be Able to Buy Lower-Rated CMBS

The US Dept. of Labor has proposed an amendment to the Employee Retirement Income Securities Act that would allow pension funds to purchase lower-rated mortgage and asset-backed securities that it is now prohibited from owning.

“I think it’s a very important development,” says Brian Lancaster, a managing director in Bear Stearns’ Financial Analytics and Structured Transactions Group. “As time goes by, it will bring in more investors and increase liquidity in these lower-rated tranches.” For example, the bid-offer spread for the AA, A, BBB and BBB- commercial mortgage-backed securities currently ranges up to 10 basis points and could tighten to 3 to 6 basis points, he says.

Currently, ERISA pension plans can buy BBB and subordinated corporate bonds but not similarly rated CMBS.