HOUSING DERIVATIVES

ABX Marks US Subprime Mortgage Inventory At Approx. 65 Cents On The Dollar

The subprime mortgage inventory value is down another 5 % since November 2007.

The ABX Index is a series of credit-default swaps based on 20 bonds that consist of subprime mortgages. ABX contracts are commonly used by investors to speculate on or to hedge against the risk that the underling mortgage securities are not repaid as expected. The ABX swaps offer protection if the securities are not repaid as expected, in return for regular insurance-like premiums. A decline in the ABX Index signifies investor sentiment that subprime mortgage holders will suffer increased financial losses from those investments. Likewise, an increase in the ABX Index signifies investor sentiment looking for subprime mortgage holdings to perform better as investments.

The ABX Index has four series (06-1 to 07-2) and five tranches per series. To get a value for the subprime mortgage inventory, one could weight the 20 available ABX values. Hypothetical weights:

06-1 - 35%, 

06-2 - 30%, 

07-1 - 20%, 

07-2 - 15%

AAA - 80%, 

AA - 5%, 

A - 6.5%, 

BBB - 2.4%, 

BBB- - 1.1%, 

Equity - 5% (marked to zero)

Using the Friday February 2008 settlements (as posted by Markit) for all the available ABX values and the above weights, the subprime mortgage inventory is valued at 64.75 cents on the dollar, down from 69.5 cents as calculated on November 23, 2007.  This is a rough estimate and quite imperfect - it assumes weights among the four series themselves and only looks at the subprime mortgages issued since 2H 2005.  This number can, however, provide a order of magnitude figure for the value of the subprime inventory.

All opinions expressed herein are those of the author, and no statement should be as an offer to buy or sell any futures contract, or security or option or other derivative instrument. Trading of all such futures, securities, options and other derivative instruments entails significant risk which can result in substantial financial loss. Such risks should be fully understood prior to trading.  Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment advisor before making any investment decisions.

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ABX Subprime Mortgage Index Still Making New Lows

The ABX Index is a series of credit-default swaps based on 20 bonds that consist of subprime mortgages. ABX contracts are commonly used by investors to speculate on or to hedge against the risk that the underling mortgage securities are not repaid as expected.  ABX has been unable to launch a 2008 series yet due to too little new RMBS issuance.

Today, according to Markit, 12 of the 20 tranches available for trading made and settled on new lows.  Four of the 20 tranches settles near their low settlements.  The AAA tranche of the 06-1 series settled at 93.54%... it is the only tranche that has retained the best value to long investors.  The AAA tranche of the 07-2 series is the lowest AAA, settling at 63.53%, a new low.

Housing asset value indexes like Radar logic and S&P/Case-Shiller are showing the five year forward housing prices nationally falling about another 20% from current index levels.

ABX Index Still Making New Lows

The ABX Index is a series of credit-default swaps based on 20 bonds that consist of subprime mortgages. ABX contracts are commonly used by investors to speculate on or to hedge against the risk that the underling mortgage securities are not repaid as expected.

Today, nearly all of the tranches of the 06-2, 07-1 and 07-2 series settled on their lows, near their lows or made new lows.  Source: Markit.  The functional zero of the the BBB tranches, which looked like it had been set last year, is being broken.

The Highest ABX Tranches On Lows

The ABX Index is a series of credit-default swaps based on 20 bonds that consist of subprime mortgages. ABX contracts are commonly used by investors to speculate on or to hedge against the risk that the underling mortgage securities are not repaid as expected.

The AAA tranches, the first to get paid, are all right above their lows.  For example, the AAA 07-2 tranche settled yesterday at 66.08 (the low was 65.50).  These are the "safest" of the tiers.  Most of the BBB-, BBB and A tranches are at or near functional zero.

CMBX Spreads Marking All-Time Highs

The sister mortgage derivative to the ABX index is the CMBX index.

CMBX derivatives, as reported by Markit, are a group of indexes made up of 25 tranches of commercial mortgage-backed securities (CMBS), each with different credit ratings. The CMBX indexes are the first attempt at letting participants trade risks that closely resemble the current credit health of the commercial mortgage market by investing in credit default swaps, which put specific interest rate spreads on each risk class. The pricing is based on the spreads themselves rather than on a pricing mechanism.

Today, the CMBX spreads settled at all-time highs.

ABX Subprime Index Making New Lows

The ABX Index is a series of credit-default swaps based on 20 bonds that consist of subprime mortgages. ABX contracts are commonly used by investors to speculate on or to hedge against the risk that the underling mortgage securities are not repaid as expected.

The lowest tranches of the ABX Index, the BBB-, settled on lifetime lows today according to Markit.  The 2007 series also posted new lows across most of the tranches.  The ABX AAA 07-2, the highest tranche of the most recent vintage, settled at 66.5%, right near it's lifetime low.  The ABX AAA 07-1 made a new low at 68.66%.

ABX Index To Postpone New 2008 Series Launch

The ABX Index is a series of credit-default swaps based on 20 bonds that consist of subprime mortgages. ABX contracts are commonly used by investors to speculate on or to hedge against the risk that the underling mortgage securities are not repaid as expected.

The ABX Index has four series trading, two for 2006 and two for 2007. Markit, owner of the Markit ABX.HE index, announced today that the roll of the Markit ABX.HE has been postponed for three months.  In January 2008, the ABX 08-1 was scheduled for launch.  From Markit news release:

"The new series, the Markit ABX.HE 08-1, was scheduled to launch on 19 January 2008. The decision to postpone its launch was taken following extensive consultation with the dealer community. It follows a lack of RMBS deals issued in the second half of 2007 and eligible for inclusion in the forthcoming Markit ABX.HE roll. The Markit ABX.HE 07-2 remains the on-the-run series until further notice."

All opinions expressed herein are those of the author, and no statement should be as an offer to buy or sell any futures contract, or security or option or other derivative instrument. Trading of all such futures, securities, options and other derivative instruments entails significant risk which can result in substantial financial loss. Such risks should be fully understood prior to trading.  Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment advisor before making any investment decisions.

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Housing Derivatives - ABX Bounce

All ABX tranches for the 07-1 series have bounced off of lows made in late November / early December.  The AAAs, AAs and As have made the biggest bounces (nearly 10%) and the BBBs bounced approximately 5%.   The RPX housing swaps and CME housing futures markets have remained pinned at their pricing lows (see previous post). 

All opinions expressed herein are those of the author, and no statement should be as an offer to buy or sell any futures contract, or security or option or other derivative instrument. Trading of all such futures, securities, options and other derivative instruments entails significant risk which can result in substantial financial loss. Such risks should be fully understood prior to trading.  Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment advisor before making any investment decisions.

housing derivatives housing futures hedging case-shiller index radar logic rpx futures forward cme

ABX Marks US Subprime Mortgage Inventory At Approx. 70 Cents On The Dollar

The ABX Index is a series of credit-default swaps based on 20 bonds that consist of subprime mortgages. ABX contracts are commonly used by investors to speculate on or to hedge against the risk that the underling mortgage securities are not repaid as expected. The ABX swaps offer protection if the securities are not repaid as expected, in return for regular insurance-like premiums. A decline in the ABX Index signifies investor sentiment that subprime mortgage holders will suffer increased financial losses from those investments. Likewise, an increase in the ABX Index signifies investor sentiment looking for subprime mortgage holdings to perform better as investments.

The ABX Index has four series (06-1 to 07-2) and five tranches per series. To get a value for the subprime mortgage inventory, one could weight the 20 available ABX values. Hypothetical weights:

06-1 - 35%,  06-2 - 30%,  07-1 - 20%,  07-2 - 15%

AAA - 80%,  AA - 5%,  A - 6.5%,  BBB - 2.4%,  BBB- - 1.1%,  Equity - 5% (marked to zero)

Using the Wednesday settlements (as posted by Markit) for all the available ABX values and the above weights, the subprime mortgage inventory is valued at 69.5 cents on the dollar.  This is a rough estimate and quite imperfect - it assumes weights among the four series themselves and only looks at the subprime mortgages issued since 2H 2005.  This number can, however, provide a order of magnitude figure for the value of the subprime inventory.

All opinions expressed herein are those of the author, and no statement should be as an offer to buy or sell any futures contract, or security or option or other derivative instrument. Trading of all such futures, securities, options and other derivative instruments entails significant risk which can result in substantial financial loss. Such risks should be fully understood prior to trading.  Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment advisor before making any investment decisions.

housing derivatives housing futures hedging case-shiller index radar logic rpx futures forward cme

Housing Derivatives - Every ABX Derivative Settle On All-Time Lows

The ABX Index is a series of credit-default swaps based on 20 bonds that consist of subprime mortgages.  ABX contracts are commonly used by investors to speculate on or to hedge against the risk that the underling mortgage securities are not repaid as expected.  The ABX swaps offer protection if the securities are not repaid as expected, in return for regular insurance-like premiums.  A decline in the ABX Index signifies investor sentiment that subprime mortgage holders will suffer increased financial losses from those investments.  Likewise, an increase in the ABX Index signifies investor sentiment looking for subprime mortgage holdings to perform better as investments.

Today, every ABX tranche ever issued settled on it's low price. The BBB and BBB- settlements range between 25.46% to 16.89%. Some of the AAAs settled at under 70%. Source: Markit. 

All opinions expressed herein are those of the author, and no statement should be as an offer to buy or sell any futures contract, or security or option or other derivative instrument. Trading of all such futures, securities, options and other derivative instruments entails significant risk which can result in substantial financial loss. Such risks should be fully understood prior to trading.  Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment advisor before making any investment decisions.

housing derivatives housing futures hedging case-shiller index radar logic rpx futures forward cme