ABX & CMBX Go Parabolic – ‘Carnage’

Posted on November 18th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

ABX and CMBX spreads are predicting Armageddon is upon us. The credit markets are locked up tight, as it is obvious that there is no more that can be done through intervention.  Despite the financial media pumping that the ‘credit markets are thawing’, deals are not getting done, credit across all sectors is tighter than ever and it is getting worse by the day.

The rush into US Treasuries is intense. To top it off, Bloomberg ran a story that Buffett’s Berkshire CDS are blown out to 415 from 140 a few weeks ago. Arguably, stocks are not following credit rather trading in a vacuum on rumor, hype and hope whistling past the proverbial graveyard.  Paulson announcing publicly that TARP would not be used to buy troubled assets dashed most of the remaining hope.

There are very few words to describe the action in the ABX and CMBX indices since it was made public that TARP would not be used to buy distressed assets. The pictures below are worth 1000 words. Today, Paulson argued that ‘the financial markets are much more stable today than before the TARP’.  These pictures argue the opposite. These pictures are as close to Armageddon as the financial markets and possibly system has ever been. -Best, Mr Mortgage

AAA residential – ABX second half 2007 HIGHEST GRADE credit at 31 cents

AA residential – ABX second half 2007 AA credit at 6 cents

BBB residential – ABX second half 2007 BBB credit 3 cents (very little difference between AA and BBB)

AAA Commercial – HIGHEST GRADE – Spreads have gone parabolic! From 200 to over 550 in a week.

BBB- Commercial – LOWEST GRADE – absolute implosion! Yes that’s 3800.

Lastly, commentary from my new favorite blogger, Across the Curve about the action.

Acronymic Angst

November 18th, 2008 1:38 pm

There is carnage in the asset backed markets again. I am not well versed on this stuff but in cobbling together a story it is pretty ugly. So by way of example one derivative veteran noted that the last cash flow AAA pieces of the ABX Index have declined 14 points in the last month.The failure of the Administration to roll out the TARP has done major damage in the cash CMBS market. AAA paper in this market is trading swaps plus 1000 basis points. Investors in the sector did not load up the boat in anticipation of higher prices but the anticipation of the Administration as White Knight did act to motivate some potential sellers to congregate on the sidelines. With the news that the White Knight will not arrive, many of those folks are now disengorging themselves of securities.

The CMBX index has widened 75 basis points today and has moved 250 basis points in the last 5 days. Market participants inform me that insurance companies are loaded to the gills with this stuff and are probably feeling quite uncomfortable.

Most of the participants felt that the pressure to unload this stuff would be unrelenting between now and year end and it is likely that spreads will continue to widen.

19 Responses to “ABX & CMBX Go Parabolic – ‘Carnage’”

  1. Wait until the earnings reports come filing in. Q2 of 09′ will be where the rubber hits the road. Stocks will begin to be priced accordingly because they are still based on hopes and dreams. The Government will be behind the AAA rating 8 ball at that point and may begin to default on some of it’s debts. If not, it will be printing enough new currency to destory any hopes of escaping interest rate inflation or a “soft” landing. Couple that with commodity deflation and you have the end of the world as we know it. There is no solution, other than returning to a hard asset backed currency and reign in government spending at ALL levels. The tax increases will be a recycle of FDR’s action and you know how that little diddy played out.

  2. it would be interesting to know what kind of volume are currently traded those days as i’m not sure it is now representative due to extremely low volume

  3. But it cannot be, Paulson just promised us that he was saving the other 350 billion for Obama. All problems solved…

  4. Seems like every chart I look at these days is going parabolic as is my blood pressure (no I’m not kidding). We just don’t have the leadership (anymore) in this country that can right our ship before she wrecks. Yet, as much as I’ve tried to warn people, most remain willfully apathetic.

  5. The information Mr. Mortgage has revealed is absolutely true (as usual…nice work). Those charts look horrible. This just confirms that when governments intervene and mess with the system, things tend to get much worse than if they had done absolutely nothing. The rapid fall of the dollar can not be far behind.

  6. Yes, for sure.
    This was definitely caused by the government.
    The failure of the government.
    The failure of the government to police capital markets.
    We have the legalized crime of banking.
    The failure of the government to prevent financial chaos.
    We have financial and economic instability and the dual-headed deflation coming round the bend.
    The failure of the government to print its own money.
    Which is in its power, rather than going to Wall Street where they create money out of thin air to lend to the government.
    The failure of the government to act for the good of its people.
    This is definitely the fault of the government.
    If only they had done, or only had not done, SOMETHING !

  7. Got bunker?

  8. Forgive my ignorance, but what do the ABX and CMBX charts represent? I’m not familiar with them.

    Thank you for educating me.

  9. I guess this was inevitable as the end-game. When you dont really produce anything other people want and then proceed to max out your credit to just keep going….what is the final episode to this series? Utter failure. Frozen corporate credit, contracting consumer credit, rising unemployment and collapsing earnings. Yup, it’s a party.

  10. I can’t wait for the ax to fall on state workers!

  11. Am I the only one scratching my head on this?

    What sort of default rates and loss given defaults would you need to get to a 31 cent recovery on AAA MBS since these bonds included at least a modicum of subordination? 100% defaults and 75% losses?

    WTF? Were these loans secured by ocean-front property in Kansas?

  12. As goes California goes the nation. California will start defaulting on its debt within the next 4 months… Thanks Arnold.. Remember this campaign promise. “I will tear up the states credit cards”….My ASS

  13. With Case-Shiller getting donkey punched to the extent it has, I don’t think it’s surprising that HELOCs are trading at substantial discounts.

    I’ve been as bearish as they get for a while and I think we’re getting to a point where there’s light at the end of the tunnel. You’re seeing pickups in sales volume at lower prices on real estate. You’re seeing gas prices crashing before your eyes. Joe Sixpack paid $4/gallon in January, now he pays $2. If he fills his 15 gallon tank up once a week, that’s $1,500 extra in he’s got per year–that’s a lot more money than the stimulus package, especially if you overlay that on a household with two cars–$3,000 extra per year…that’s a LOT of dough.

    Lower prices will solve a lot of the problems people have been whining about the past couple of years. Give it a few more months and I think the light at the end of the tunnel will be rather bright.

  14. Absolute proof that housing is in full recovery: http://realtytimes.com/

    so what if it sounds like an a post midnight, infomercial 😉

  15. Mr. Mortgage,

    You are correct, Sir. Carnage. Thank you again for quality posting.


  16. This is unbelievable. The FIRE economy has finally done it! All of these bailouts are like putting a bandaid on cancer. The government needs to get out of the free markets and let capitalism succeed or fail on the premise of creative destruction. If an institution is deemed too big to fail, than it is too large and it NEEDS to fail….good post Mr. Mortgage.

  17. The light at the end of the tunnel will be bright alright, On the front of a train plowing towards you….

  18. Here is a good slidehow explaining the ABX index from Markit.


    I think you need to keep in mind the ABX only tracks securitizations issued up through the 2nd half of 2007 as thee types of products weren’t really written after that. I believe the AAA in the ABX is not FNMA paper but instead Alt-A, JumboA paper that had AAA ratings that isn’t issued anymore. If you look at the Constituents in the AAA ABX it is made up of players in the AltA and subprime market. So the index is showing the demise and sentiment of the old paper which we know is junk. I think there is greater confidence in the newer FNMA, GNMA paper being written and securitized. No doubt that the change in TARP has drowned TARPtimism, but new issue Agency MBS are trading and holding up decntly well for the levelof fear out there.

  19. Thank you for your link – it explained everything.

    Best regards,

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