ABX Bonds: Longer in Duration, Lower in Priority

To further flesh out the point I made yesterday—that the bonds included in the ABX subprime mortgage index are, without exception, the longest-duration, least-creditworthy AAA bonds in the trusts from whence they came, I selected at random member of the ABX 07-1 index, the A2D class from the of GSAMP 2006-HE5 trust, and compared it to the recent prices of the other bonds from that same trust. Sure enough, the A2D is the runt of the litter. Its price is nowhere close to those of the trust’s other bonds. Take a look:

A few observations. First, this clearly shows how much lower in quality and priority the bonds that underlie the ABX are (even though they’re still rated AAA) compared to subprime AAA mortgage bonds in general. The average price of bonds in the trust, excluding the A2D, is 94%, versus the 68% quote on the A2D. Second, the impact of spread-widening is obvious when you compare weighted average life to price. There is a perfect correlation. In addition, there also appears to be some credit fear built into the A2C (85%) and the A2D (68%).

Comments

[bobtailnag:]

Mr. Maxfield,
Is it possible that ABX is a proxy for much of the Global Valuation downgrades on subprime debt? If so does this mean that the writedowns to date and the near term future ones are being overdone by a wide margin? Wouldn't this result in overstated paper losses to many of the financial entities? Losses that may in fact one day reappear as gains if held by the writedown owner or as market appreciation if the securities are traded over time.
Thank you again for such a clear explanation.

2008 Mar 06 07:47 AM