Sunday, February 25, 2007

Quick ABX Update

For five weeks running the ABX BBB- index of credit default swaps has been plunging, finishing Friday at just under 69. That means it now costs 1-1/4 million dollars a year to protect 10 million worth of the bonds against default.Tom Petty's "Free Fallin'" comes to mind when I see that chart. Perhaps Peter Schiff, president of Euro Pacific Capital is correct in thinking that the BBB- ABX contracts will go to zero. In more ominous fashion, A rated tranches are also weakening. Here's something to ponder:
Sorry, but these charts of what swap players are willing to pay don't lie. It should be noted that this index tied to the A rated tranches is still above 90 (ABX scaling makes it look worse), but there has clearly been deterioration which is an indication that spillover from subprime is starting to occur into the what are supposed to be higher quality, or "safe" areas of the mortgage world. Only $1 trillion in adjustables will reset this year. But, don't worry be happy - right?


Anonymous said...

According to MarketWatch...
The ABX.HE index that tracks CDS on the riskiest subprime loans, rated BBB-, that were sold in the second half of 2006 fell to 69.39 on Friday, according to, which administers the indexes. That's down from 72.71 on Thursday and 79.04 at the beginning of the week. In early February, this index was above 90.
Friday's price means that if investors wanted to buy protection against default on a notional $10 million of these loans, they would need to pay $3.061 million up front, plus a fixed 2.42% annual payment. This is a record low, and represents a spread of roughly 1,500 basis points."

How did you calculate that "it now costs 1-1/4 million dollars a year to protect 10 million worth of the bonds against default."?


Jim K said...

i'm waiting for my wife at the supemarket... but $1.25 mln sounds right at this stage of the game.... $3 mln??? to insure $10 mln of bonds with the index at 69 seems a tad bit high.

Anonymous said...

Doesn't the ABX index only reference 20 subprime mortgage deals?

Jim K said...

yes, 20... and the number I see in a few places is 1.25, but i will check the market watch story a little later.