Revisiting CDS-Land

Submitted by Rich Toscano on February 23, 2007 - 12:44pm

A while back I wrote about the rather sudden increase in the cost of credit insurance for on low-rated subprime MBS tranches. The net effect was that the cost of credit protection for these mortgage-backed securities had increased by 25% in just a week.

The below chart shows the same index of low-ratest subprime CDS tranches we looked at earlier:

ABX-HE-BBB- 06-2

Credit protection on the BBB- tranches has now increased fourfold in just a few months, to about 1,000 basis points.

Now, it seems that this deterioration has rather suddently started to eat away at the higher-rated tranches:


Please note that the scale is very different on the two graphs... the BBB- index is down to 72.5 while the AAA index is still at 99.7. However, even the move seen in the second graph is pretty abrupt for what's supposed to be a AAA rated security.

This is all part and parcel of the general meltdown we are seeing in the world of subprime. Other symptoms include lenders tightening their standards, seeing their stocks drop 40% in a day, or outright shutting down. The payback for years of reckless lending has been fast and furious. And it's not over yet.

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Submitted by Bugs on February 23, 2007 - 4:35pm.

Kinda looks like a cliff.

Submitted by superfly19 on February 23, 2007 - 4:51pm.

Are these indexes something that can be shorted?

Submitted by DCRogers on February 23, 2007 - 7:51pm.

Want to bet it will get worse? Here's support, and info on how:

"The BBB- rated portions of ABX contracts are ``going to zero,'' said Peter Schiff, president of Euro Pacific Capital, a securities brokerage in Darien, Connecticut. ``It's a self- perpetuating spiral, where as subprime companies tighten lending standards they create even more defaults'' by removing demand from the housing market and hurting home prices, he said.

Schiff said he has steered his clients to invest in the U.S. Residential Real Estate Hedge V fund, which has $17 million in bearish bets through ABX contracts. The fund has made about 50 percent this year, said Andrew Lahde, head of Ladhe Capital Management in Santa Monica, California and manager of the fund."

Submitted by CA renter on February 24, 2007 - 4:05am.

I do believe the bears are about to be exonerated.

Nothing mattered, IMHO, as long as lenders were handing out $500K loans like cotton candy at the county fair. God be willing, we are about to see the bottom drop out of the housing market -- and affordable housing will finally be restored.

The bell has finally tolled.

Submitted by superfly19 on February 24, 2007 - 10:22am.

Does anyone have any ideas on a way to short these that is traded on the exchanges? The U.S. Residential Real Estate Hedge fund above seems like a good option, but it isn't traded on the exchange. You have to contact the funds broker directly.

Submitted by JWM in SD on February 24, 2007 - 11:46pm.

Yes, the grim reaper of subprime boiler rooms, that would be Merrill Lynch, is going to pull their plugs one by one over the next year or so. This is just the beginning...

For all of you permabull clowns, and you know who you are, don't say you weren't warned.

Submitted by no_such_reality on February 25, 2007 - 8:38pm.

The bell has finally tolled.

Yes, but will the economy still be standing the morning after?

Submitted by Duck on February 27, 2007 - 8:24am.

I'd be very careful about betting on the ABX It's thinly traded, was launched only a year ago and is an index that follows just 20 bonds which is a fraction of the overall market. It will be very volatile and who knows what traders really control the price movements.

Also, that Residential Hedge fund was just created about 2 weeks ago.

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