Price Forecast:

Bullish Case: A potential recovery in CMBS values is supported by stabilized office markets and anticipated rate cuts, which could drive investor demand and greater liquidity, as indicated by increasing historical return probabilities.

Bearish Case: Persistently high vacancies and defaults in commercial real estate pose significant risks. If economic conditions worsen leading to stricter liquidity, CMBS prices could further decline, reflecting the current elevated implied volatility readings.

Potential Outcomes:

1. Increased demand due to rate cuts (40%);

2. Continued defaults lead to significant price declines (30%);

3. Stabilization in office market supports recovery (20%);

4. Geopolitical uncertainties disrupt investment climate (10%).

Trading Oracle: Implement a bullish debit spread on CMBS options, targeting 49-52 strike calls. Focus on 1-3 month expirations to capitalize on expected price appreciation from rate cuts and enhanced demand, leveraging rising implied volatility for maximum gain.

November 21, 2024