At shorter maturities, the increases were higher, while at longer maturities the decreases were greater. Accordingly, the slope of the yield curve became flatter. These changes most likely reflected actual and anticipated changes in policy rates as set by the Federal Reserve Board.

At the same time, the yield curve flattening lay behind a significant decrease in term premiums embedded in credit spreads for shorter-term commercial mortgages. The three-year premium decreased by 35 bps during the quarter, moving from 75 bp to 40 bp. The five-year premium meanwhile dropped from 40 bp to 10 bp, a 30-bp change.

Finally, credit spreads continued to decline during the most recent quarter. The G-L Index composite of major sectors registered an 11-bp decline. The most recent high for credit spreads was near 200 bps in the middle of 2016, when Treasury yields were at historic lows. Since then, spreads have come down roughly 40 bp.

All of these factors combined to produce the index's 1.05% price return. Given the range of changes in Treasury yields, this is an average, as results varied meaningfully across maturity segments. The credit effect measure, which includes losses and unpaid interest, remained at three bp on a four-quarter trailing basis.

“The G-L Index's performance against investment-grade fixed-income sectors was again favorable,” says Michael Giliberto, co-creator of the G-L Index. It surpassed the 1.35% total return generated by CMBS during Q2, according to the Bloomberg Barclays Index. At the same time, Baa-rated intermediate-term corporate bond produced 2.04% on a duration-matched basis, a return comparable to that of the Index.

Launched in 1993, the G-L Index is a performance benchmark for investments in private-market real estate debt. It tracks fixed-rate, fixed-term senior loans that are made by and held in the investment portfolios of institutional lenders such as life insurance companies and pension funds.

RICHMOND, VA—Second-quarter total returns for private-market loans in investor portfolios, as tracked by the Giliberto-Levy Commercial Mortgage Performance Index, came in ahead of those for Q1 and also beat quarterly returns on CMBS, according to data released Tuesday by John B. Levy & Co. The latest G-L Index shows a 2.11% total return for Q2. That compares to a total return of 2.01 in the first three months of this year.

“Multiple factors came into play to drive commercial mortgage investment returns in the second quarter,” says John B. Levy, co-creator of the index. “Differences in Treasury yields, a decrease in term premiums for shorter mortgages and the continued decline in credit spreads” all had a bearing on the G-L Index's Q2 results.

The quarterly income return for Q2 was 1.11%, while capital value produced 1.01%, consisting of a 1.05% price return and a -0.04% contribution from other factors. Year-to-date, total returns are 4.16%, marking a strong first half to the current year.

As Levy observes, Q2 saw some Treasury yields moving up while others headed down. The smallest changes, in absolute value, were a five-basis-point increase in the three-year yield and a four-bp decrease in the five-year yield.

At shorter maturities, the increases were higher, while at longer maturities the decreases were greater. Accordingly, the slope of the yield curve became flatter. These changes most likely reflected actual and anticipated changes in policy rates as set by the Federal Reserve Board.

At the same time, the yield curve flattening lay behind a significant decrease in term premiums embedded in credit spreads for shorter-term commercial mortgages. The three-year premium decreased by 35 bps during the quarter, moving from 75 bp to 40 bp. The five-year premium meanwhile dropped from 40 bp to 10 bp, a 30-bp change.

Finally, credit spreads continued to decline during the most recent quarter. The G-L Index composite of major sectors registered an 11-bp decline. The most recent high for credit spreads was near 200 bps in the middle of 2016, when Treasury yields were at historic lows. Since then, spreads have come down roughly 40 bp.

All of these factors combined to produce the index's 1.05% price return. Given the range of changes in Treasury yields, this is an average, as results varied meaningfully across maturity segments. The credit effect measure, which includes losses and unpaid interest, remained at three bp on a four-quarter trailing basis.

“The G-L Index's performance against investment-grade fixed-income sectors was again favorable,” says Michael Giliberto, co-creator of the G-L Index. It surpassed the 1.35% total return generated by CMBS during Q2, according to the Bloomberg Barclays Index. At the same time, Baa-rated intermediate-term corporate bond produced 2.04% on a duration-matched basis, a return comparable to that of the Index.

Launched in 1993, the G-L Index is a performance benchmark for investments in private-market real estate debt. It tracks fixed-rate, fixed-term senior loans that are made by and held in the investment portfolios of institutional lenders such as life insurance companies and pension funds.