Corporate bonds & commercial mortgages: The relationship between them

Corporate bonds & commercial mortgages: The relationship between them


What is the relationship between corporate bonds and commercial mortgages??

In the market today, we see that corporate bond rates have been rising even though index rates have been falling, causing spreads to increase. The reason life insurance companies do mortgages is to augment their bond portfolios. Mortgages provide stable cash flows similar to bonds but return better yields due to their lack of liquidity.

Since mortgages are viewed as alternatives to bonds, the pricing of a mortgage is impacted by changes in bond prices. Therefore, if bond pricing widens, then spreads will also go wide even if the treasury goes down. Yet, if the treasury and bond pricing go up, then we’d see everything go wide. This is the primary reason we care about where corporate bonds are trading. The yields on corporate bonds show us the cost to borrow for the best companies are in the United States and the spreads charged on mortgages move up and down with the corporate bond rates.



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