Final answer:
CMBS trade more like corporate bonds than RMBS due to their fixed, pre-set cash flows from long-term leases, which minimizes prepayment risk. This predictability in cash flows aligns them more with corporate bonds, making them behave differently than RMBS in the financial markets.
Step-by-step explanation:
The characteristic that makes commercial mortgage-backed securities (CMBS) trade more like corporate bonds than agency residential mortgage-backed securities (RMBS) is largely due to the fixed, pre-set cash flows. Unlike RMBS, which often come with prepayment risks due to the unpredictable nature of individual mortgage behaviors, CMBS are typically tied to properties like office buildings or shopping centers that have long-term lease agreements, producing cash flows that are more stable and predictable, akin to corporate bonds.
Prepayment risk associated with RMBS is therefore significantly lower in CMBS, making their cash flows more comparable to corporate bonds. Therefore, investors in CMBS can expect a more consistent return, without the need to model for varying prepayment speeds typically associated with RMBS. This characteristic is essential in the valuation and trading of these securities and in how they are perceived by the market.
Moreover, the structure and the underlying assets of CMBS contribute to their bond-like behavior. The various tranches within CMBS, which are structured to absorb losses at different thresholds, further align their trading patterns with corporate bonds rather than the prepayment-variable RMBS.