Commercial mortgage rates headed north over the past 30 days, according to the Barron's/John B. Levy & Co. National Mortgage Survey of more than 30 investors in individual mortgages and in mortgage securities. Treasuries continued to be volatile, with the yield on the 10-year Treasury dipping as low as 5.75% and hovering in the 6.2% range late in April.

There was unusual pricing confusion in the market for whole, or individual, loans. Many institutional lenders continued to keep their 10-year spreads - the gap between the yields of 10-year Treasuries and mortgages of the same duration - in the range of 1.85 to 2 percentage points in order to attract borrowers. As one participant put it, "Capital is on sale."

A competing group of institutional lenders, keeping a sharp eye on commercial mortgage-backed securities (CMBS) and corporate markets, raised their spreads to the 2.25 - 2.50 percentage-point range. They reasoned that this level was needed in order to offer an attractive alternative to corporate and other asset-backed securities. But increasing spreads to the higher level had a predictable consequence: "It just killed loan demand," according to American Express' Kevin Abrahamson.

Sticky whole-loan spreads did have some positive impact, at least in the short term. According to the Giliberto-Levy Commercial Mortgage Performance Index, commercial loans produced a total return of 3.53% for the first quarter, trouncing the Lehman Brothers' Baa duration-adjusted corporate bond index, which showed a total return of 1.14%.

The mortgage-securities market saw a rush of activity. On the new origination side, at least four transactions were in the market, including two Manhattan single-asset borrowings backed by a Rockefeller Center office building at 1211 Avenue of the Americas and a building at 4 Times Square. First Union and Merrill Lynch were also in the market with a $705 million garden-variety conduit transaction backed by 145 loans. The First Union deal was the first pure conduit securitization to come to market in some time, and at the end of April was enjoying only fair success. The $485 million Class A-2 tranche, rated triple-A, which was initially scheduled to price in the range of 0.38-0.40 percentage points over interest-rate swaps, had widened materially to the area of swaps plus 0.42-0.43 points. The Class-E rated triple-B was scheduled to price at Treasuries plus a spread of 2.4 percentage points, relatively unchanged from the initial price talk, or estimates. Several conduit buyers noted that the largest loans appeared to have relatively high leverage, which cooled their interest in the deal, while others noted that the original price talk was just too aggressive.

But despite the lackluster response to the First Union transaction, the secondary market was red-hot. A number of total-return money managers were offering CMBS bonds for sale and were pleased with the aggressive bids they received. According to Lehman Brothers' Ken Cohen, more than $1.5 billion in triple-A CMBS traded in the past two weeks alone.

Continued volatility in the fixed-income markets has caused some conduits, or CMBS packagers, to change how they offer mortgage prices to borrowers. In the past, the convention was to price the loan at a spread over the 10-year Treasury. Because spreads have become so volatile, a few conduits are now offering spreads to borrowers that are priced over interest swaps - instruments that convert floating rates to fixed rates.

The conduits argue that since most CMBS buyers are migrating toward swaps-based pricing, it only makes sense for them to offer swaps-based pricing on the whole-loan side to borrowers as well. This puts the risks of the highly volatile swaps market on the developer's back and not the conduit's.