By Al Yoon The extended period of unusually low interest rates is creating fresh headwinds for the commercial mortgage-backed securities market as Wall Street dealers prepare to sell at least $2 billion of bonds in coming weeks. As CMBS yields follow benchmark Treasurys lower, banks are grappling with interest-rate risk--the degree that bond prices fall as rates rise--as much as the credit risk that has dominated the conversation for years. The unexpected turn of events may require dealers to offer floating-rate debt or mark down prices on new fixed-rate CMBS in order to attract investors. Lower prices translate into higher yields on fixed-income securities. "It's very difficult to sell 10-year CMBS right now," Harris Trifon, head of CMBS strategy at Deutsche Bank, said while attending the Commercial Real Estate Finance Council's annual conference in Washington. "It's not that people aren't happy with the asset class. It's more about the yield." A $1 billion issue from Wells Fargo Securities, a unit of Wells Fargo & Co. (WFC), and the RBS Securities unit of Royal Bank of Scotland (RBS, RBS.LN) signaled a shift in how underwriters will sell their bonds. The two dealers had to cut the size of its top 10-year class by 15% and put that $75 million into a floating-rate class specially crafted for investors wary of taking such duration risk, said investors briefed on the issue. The dealers sold 10-year debt at 140 basis points over interest-rate swap rates, or just above the 3% level that appears to be a floor for some buyers. Stephen Schwartz, a CMBS trader at RBC Capital Markets, said investors have shown a decided preference for bonds with lower credit and interest-rate risk in the secondary markets, too. Overall, 10-year CMBS from 2011-2012 have underperformed shorter bonds in recent weeks, he said. The rub for the $600 billion commercial-mortgage-backed securities market is that most of the loans bundled into the securities are made with 10-year maturities and fixed interest rates. So how dealers will cope with the shift in demand, on top of the macroeconomic clouds, has been a common theme in many meetings at the industry conference, analysts and traders said. Whether dealers can follow Wells Fargo and convert some fixed-rate payments to floating rate is in question, as it involves creating an interest-rate swap whose costs depends on issuer credit ratings, said one CMBS trader. UBS AG (UBS, UBSN.VX) and J.P. Morgan Chase & Co. (JPM) are among dealers preparing issues near $1 billion each in coming weeks, said the trader familiar with the offerings. Interest-rate risk has also crept into the less volatile market for agency commercial mortgage bonds issued by Freddie Mac (FMCC), Fannie Mae (FNMA) and Ginnie Mae whose yields are already lower because of their government support. Freddie Mac has focused most of its sales this year on seven-year maturities, which "are a little easier to get done," than 10-year issues, said David Brickman, a senior vice president at Freddie Mac. Freddie Mac will likely sell a floating-rate issue in 2012, though that's mostly because the company has funded floating-rate loans, he said. Interest-rate concern or worries about rising risk premiums haven't significantly affected CMBS lending, as the latter issue did last summer, Mr. Trifon of Deutsche Bank said. What's more, there is "a lot" of cash that money managers still have earmarked for the sector, he said after meeting with investors at the conference. What's certain is that interest-rate risk appears here to stay as global fiscal and economic issues keep bond yields low, he said. "That's going to be part of the future," he said. Write to Al Yoon at firstname.lastname@example.org.