Wednesday, November 19, 2008

The Debts of the Spenders: The Coming Collapse of Commercial Real Estate

The perception of value in US commercial real estate has completely evaporated in November as this chart from CMBX illustrates. The chart maps the staggering jump in CDS insurance or the cost of using credit swaps to protect corporate bonds and loans from default.

Interest rates on U.S. commercial paper also rose to the highest in almost two weeks, according to yields offered by companies and compiled by Bloomberg. This is reflected in the yield (aka borrowing costs) in terms of basis point increases. Traders are pricing in higher yields as paranoia now rules the day.

To be fair, a contrarian viewpoint is that these elevated levels are not based on reality but rather pure fear. A short term turnaround - if not capitulation - could be around the corner.