Saturday, October 27, 2007 2:11:33 PM
skono4:
well i'm no expert (or even amateur
in trading credit default swaps, so i've attached a description from the urbandigs nyc real estate blog. i've actually seen a better description in another blog (i'll probably find the reference to it later on), where it was argued that when these things are trading below about 50, there's an agreement that the underlying bonds are ultimately worthless, and the value is just a bet on time until default.
what you're looking at in that chart is the index corresponding to the BBB tranche of some residential mortgages that were securitized in the first half of 07. defaults cascade up from the BBB- tranche through AAA.
"The ABX Index is a series of credit-default swaps based on 20 bonds that consist of subprime mortgages. ABX contracts are commonly used by investors to speculate on or to hedge against the risk that the underling mortgage securities are not repaid as expected. The ABX swaps offer protection if the securities are not repaid as expected, in return for regular insurance-like premiums. A decline in the ABX Index signifies investor sentiment that subprime mortgage holders will suffer increased financial losses from those investments.
"This index is in total FREEFALL; look at the chart on the right showing you the steep selloff in the past week or so! It all started around Oct. 11th, the same time that the mortgage insurance stocks (I'll get to this in a moment) started their freefall as well! Coincidence? No way! It is a clear sign that something is brewing in the credit world as investors remove bids for anything associated with subprime investments. In my opinion, the overall stock market reacted at a delay to this brewing uncertain situation.
"CNBC's David Faber even started to acknowledge the plunge in the ABX markets mid-day Friday as the markets were in the process of a steep selloff. A bit too late if you ask me, as this situation could have been discussed earlier in the week, to raise concerns that a credit storm may be brewing again!"
well i'm no expert (or even amateur
in trading credit default swaps, so i've attached a description from the urbandigs nyc real estate blog. i've actually seen a better description in another blog (i'll probably find the reference to it later on), where it was argued that when these things are trading below about 50, there's an agreement that the underlying bonds are ultimately worthless, and the value is just a bet on time until default. what you're looking at in that chart is the index corresponding to the BBB tranche of some residential mortgages that were securitized in the first half of 07. defaults cascade up from the BBB- tranche through AAA.
"The ABX Index is a series of credit-default swaps based on 20 bonds that consist of subprime mortgages. ABX contracts are commonly used by investors to speculate on or to hedge against the risk that the underling mortgage securities are not repaid as expected. The ABX swaps offer protection if the securities are not repaid as expected, in return for regular insurance-like premiums. A decline in the ABX Index signifies investor sentiment that subprime mortgage holders will suffer increased financial losses from those investments.
"This index is in total FREEFALL; look at the chart on the right showing you the steep selloff in the past week or so! It all started around Oct. 11th, the same time that the mortgage insurance stocks (I'll get to this in a moment) started their freefall as well! Coincidence? No way! It is a clear sign that something is brewing in the credit world as investors remove bids for anything associated with subprime investments. In my opinion, the overall stock market reacted at a delay to this brewing uncertain situation.
"CNBC's David Faber even started to acknowledge the plunge in the ABX markets mid-day Friday as the markets were in the process of a steep selloff. A bit too late if you ask me, as this situation could have been discussed earlier in the week, to raise concerns that a credit storm may be brewing again!"
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