Why do CMBS trade in the market more like corporate bonds than RMBS?
What will be an ideal response?
One might think that because CMBS and RMBS are backed by mortgage loans, they would trade in a similar manner in the marketplace. That is not the case, and the primary reason has to do with the greater prepayment protection at the loan level afforded to investors in CMBS compared to RMBS.
At the structure level (i.e., when the commercial mortgage loans are pooled to create a CMBS), certain tranches can be created that give even greater prepayment protection. As a result, CMBS trade much like corporate bonds.
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