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Investors bet against US shopping centres

Investors are aggressively betting against US shopping centres using a derivatives index of commercial mortgage-backed securities that has slumped 10 per cent from its peak in January.

The health of the US retail industry has been declining for several years but recent lacklustre holiday sales, alongside rising interest rates and a stronger dollar, have reflected the intensifying pressure across the roughly $150bn industry for commercial mortgages tied to store locations and bundled up in bonds.

Department stores Macy’s, JCPenney and Sears all plan to close locations, including many centre anchor tenants. Women’s apparel retailer The Limited closed all of its 250 stores in January while BCBG Max Azria Group began closing 120 stores earlier this year as it tries to restructure its debts. 

“The same pressures we noted in 2016 and earlier are now accelerating at a quicker pace, and a good swath — but not all — of the rated US retail sector is running out of room to manoeuvre,” said Standard & Poor’s analyst Robert Schulz.

The scale of concern for the industry’s outlook is seen in the loans underpinning US centres through indices that provide investors such as hedge funds with exposure to commercial mortgage bonds.

Investors are targeting a particular index run by Markit called the CMBX 6, that tracks the creditworthiness of a basket of commercial mortgage bonds launched in 2012 and has the highest exposure to loans tied to US centres.

Morgan Stanley analysts note that CMBX 6 has the highest number of JCPenney, Sears and Macy’s stores in centres in the series of indices. The lowest “tranche”, most exposed to loan defaults, declined the most, falling 10 per cent to $79.62 on Thursday from its peak in January. Late in February the index slid to its lowest level since it was launched in 2013.

Of the other indices produced by Markit, the series of CMBX are the worst performing in 2017, while the high yield US retail sector has been the only junk industry to suffer losses so far this year, according to Bloomberg Barclays Indices. 

Investors say the sell-off has been spurred not only by recent headline announcements of store closures but also recommendations from Morgan Stanley and Deutsche Bank to “short”, or bet against, the market. 

Investors have piled in on the trade but some remain more cautious. This week the market has retraced some of its recent losses, with traders attributing the rebound to profit-taking.

“I think the CMBX sell-off is oversold in the near term,” said Tracy Chen, head of structured credit at Brandywine Global Investment Management. “This index will be very volatile this year given the raft of headlines already and that will continue. I understand the retail concern but I am not shorting CMBX right now.”

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