How Much Lower Can the ABX Go?

Going down, down, down, and it's not just BBB- junk, even the AAA's got slammed dunked on Monday, and the Triple A slid down to 95.

The Triple B- slumped down to 45-cents on the dollar (really in the dead zone)...

When will the cracks in the RMBS arena matter to Wall Street, and not only matter, but cause trouble for the market as a whole? I don't know.

It has been suggested by some that Monday's decline in ABX may be a sign of someone having to liquidate, it will be interesting to see if that's true and who it is. I am going to be working the phones today to find out more.

Comments

[piedra.j]

I think you post a fair question and the shortest answer is anybody's guess.

The ABX HE refers to Home Equity. If you assume that home prices will continue to go down, then the negative equity that many borrowers are facing might continue to deteriorate which translates into larger loses for HE loans. The amazing thing is that even mild price declines in houses bring loses in the ABX to staggering leves.

This is just the beginning of a credit crunch process that got started in housing, it is now continuing in High Yield and Leveraged Loans and will move into investment grade paper, etc. Bottom Line: This is a re-pricing process that has just started.

Even AAA ABX paper may face loses -- Remember a rating is just an estimate of the probability of defatult and in order to calculate actual losses should a default occur, then the number to look is a the "Loss Given Default" (which is going to be significantly higher than a 5 or 10% for a Home Equity related paper).

Yes today it may be just one guys liquidation, but in reality this is just a bear market for ABX.

[piedra.j]

A few additional thoughts are:
-- Rating agencies are always slow to recognize the deterioration of any credit (I bet this is one of those cases)
-- Market levels are an unbiased predictor of a paper's rating. In this case, it is basically saying that the AAA paper is in reality a single A.
-- Mark-to-market losses are just starting to hit, when they do then risk managers and others take control of the situation with a liquidation at any level following. We are far from that yet.

[john]

this is early stage deflation...much more to follow in real estate debts..
john odonnell
tradingacademy.com
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