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Yields on Commercial Mortgages Reach Record

Yields on commercial mortgage bonds relative to benchmark rates rose to record highs on concern that Lehman Brothers Holdings Inc. may dump its real estate on the market after filing for bankruptcy.

Spreads on AAA rated commercial mortgage-backed debt rose 41.25 basis points to 318.81 basis points more than benchmark swap rates as of yesterday's close, Bank of America Corp. data show. The previous record of 312.35 basis points was set March 10, the week before the Federal Reserve arranged JPMorgan Chase & Co.'s purchase of Bear Stearns Cos. A basis point is 0.01 percentage point.

"A bankruptcy is not a positive for any credit products,'' said Lisa Pendergast, an analyst at RBS Greenwich Capital in Greenwich, Connecticut. ``There is a concern that as Lehman moves into bankruptcy, the liquidation will put pressure on the prices of all commercial mortgage securities.''

The $776 billion market for commercial-mortgage debt may plummet further if more financial institutions fail and have to sell assets. Since the start of last year, banks worldwide have taken more than $514 billion in writedowns and credit losses amid the worst housing slump since the Great Depression.

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