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CREDIT MARKETS
Leading Derivatives Index
Hits Record Lows
By ANUSHA SHRIVASTAVA
October 26, 2007; Page C3
Fresh evidence that the subprime mortgage problems are worsening pummeled a key derivative index and caused investors to grow more cautious about the prospects of bond insurers and financial institutions.
Troubling data on subprime mortgage delinquencies and defaults released yesterday pushed the riskiest, BBB-minus portion of the ABX index based on mortgages made in the second half of 2006 to record lows.
Investors have used the ABX index as a gauge of the subprime market since its tracks the fortunes of mortgages extended to borrowers with shaky credit histories. The BBB-minus slice of the index traded at a record low of 18 cents before rebounding slightly to 19 cents by late afternoon.
Even the less risky slices of the index were much weaker, with the A and AA portions hit the most. The A slice of the index based on loans from the second half of 2006 was quoted at 29 cents, according to one primary dealer. This was down from a close of 32.42 cents Wednesday.
Though analysts are still digesting the reams of data on loan performance released by the trusts that hold loans that ultimately influence the ABX index, the preliminary readings of these remittance reports were bad.
"After seeing the remit reports, people are saying it's time to go back into bomb shelters because the war continues unabated," said Dan Nigro, an asset-backed securities portfolio manager at Dynamic Credit Partners in New York, a hedge fund. Mr. Nigro trades the index and has been buying protection, and therefore, benefiting from the declines in the index.
The data fed anxiety already heightened by Wednesday's writedowns at Merrill Lynch & Co. due to subprime mortgages, with the bulk coming from collateralized debt obligations.
Still, Alex Pritchartt, trader at UBS, noted recent mortgage-related developments shouldn't be a surprise to investors: "If by now anyone didn't know subprime was a problem, they haven't been paying attention."
The Treasurys market appeared well versed in the problems of subprime. It enjoyed only brief and modest flight-to-quality buying from investors spooked by the drop in the ABX index. In fact, prices ended the day lower.
Financial institutions and bond insurers were targeted by cautious investors. The cost of credit protection on insurer American International Group Inc. and bond insurers such as Ambac Financial Group Inc., rose while their stock prices tumbled as worries about their exposure to the subprime mortgage market mounted. Credit default swaps on AIG gapped out more than 0.20 percentage point to 0.59 percentage point, according to market participants. That means the annual cost of protection on $10 million of bonds would be $59,000.
Treasury Prices Fall Slightly
The Treasury bond market was condemned to another session of tracking stocks, with fresh fears for the earnings of financial institutions keeping safe-haven bids in play.
The benchmark 10-year note was down 6/32 point, or $1.875 per $1,000 face value, at 103 4/32. Its yield, which rises when prices fall, gained to 4.353% from 4.331%. Romy Varghese and Emily Barrett contributed to this article.
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