The buying binge of bonds backed by commercial mortgages gathered momentum Wednesday, as the Federal Reserve's announcement the day before that it would expand a key lending facility continued to resonate with investors.

The central bank will offer loans to investors to buy existing commercial mortgage bonds through its Term Asset Backed Securities Loan Facility, or TALF. This will benefit the holders of such bonds, mainly banks and insurance companies.

Risk premiums on the cash bonds tightened by 80 basis points to 565 basis points on Wednesday, according to Derrick Wulf, senior portfolio manager at Dwight Asset Management in Burlington, Vt.

The Fed already provides loans to buy newly created bonds backed by consumer loans and equipment lease loans, among other debt, through TALF. The Fed had proposed extending these loans to newly created commercial mortgage backed securities earlier this month.

On Tuesday, the central bank expanded the collateral it will accept to so-called legacy, or existing, securities, starting in July. It specified, however, that only the super senior, or the least-risky portions, of commercial mortgage bonds would be eligible.

"The actual details were largely expected, but the clarity is a favorable development for the market," said Aaron Bryson, an analyst at Barclays Capital in New York. "It removes any concerns about potential adverse terms or the possibility of the program being eliminated."

The inclusion of legacy securities is likely to benefit the holders of super senior CMBS bonds, typically large institutions such as life insurance companies, banks, pension funds and companies like Fannie Mae (FNM) and Freddie Mac (FRE).

While Wall Street banks packaged and sold these securities, they typically held the AA to BBB- portions of the deal, said Frank Innaurato, managing director of CMBS Analytical Services at Realpoint LLC in Horsham, Pa.

As prices on these bonds tighten, investors in these bonds are expected to benefit, with most opting to hold on to these bonds rather than sell them.

The Fed has also specified it retains the right to reject any CMBS based on its risk assessment. While this introduces some uncertainty over the specific super-duper bonds the Fed might eventually accept, it "seems like a necessary requirement for the Fed to become comfortable with the risk it is taking," say Citi analysts in a note.

While they may not see much credit risk in the top-rated portion of the bonds, they included this feature "should economic conditions deteriorate further" or if they extend the program to include lower rated portions of the bonds.

The commercial mortgage bond derivative index, the Markit CMBX AAA 5, rose about five points to 82 cents on the dollar, Wulf said, noting that on Tuesday, people were trading past the close.

"CMBX volatility has been off the charts while cash CMBS has continued to enjoy steady, broad-based demand from investors," said Wulf.

-By Anusha Shrivastava, Dow Jones Newswires; 201-938-2371; anusha.shrivastava@dowjones.com

(Prabha Natarajan contributed to this report)