Jorge Piedrahita

How Much Lower Can the ABX Go?

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.