4/10/2008: ABX spins awry

Excerpts from Subprime barometer spins awry
By Saskia Scholtes

A recent dramatic turnaround of the ABX derivative index that tracks a portfolio of US subprime mortgage bonds has underscored a thorny dilemma faced by dealers and investors trying to price hard-to-value mortgage securities.
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The AAA-rated slice of the ABX index for bonds issued in the first half of 2006 was down 24 per cent for the year in mid-March, but on Thursday was down only 10 per cent year-to-date. The same slice of the index for bonds issued in the second half of 2006, once down 32 per cent year-to-date, was on Thursday just 18 per cent lower for the year.
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Liquidity is terrible and client inquiries have virtually ground to a halt. Trading is mostly happening on interdealer screens between eight to 10 guys, and this means that prices can move wildly on very light volume,” said one trader.

Jay Hallik, head of US ABS trading at Morgan Stanley agreed: “The past week or two, trading has been primarily dealer-driven, with the result that the index can quickly move a couple of points on relatively small size, sometimes $25m to $50m trades.”