Slumping ABX Mortgage Index Implies Further Writedowns
The ongoing crisis in the US housing market is pushing a key mortgage-linked derivatives index to new lows, threatening to unleash a further bout of credit market upheaval, according to the Financial Times.
The price swing in the index, known as the ABX, is particularly significant, since it is starting to reduce the value of credit instruments that carried high credit ratings, and were therefore supposed to be ultra-safe.
Some analysts fear that the price moves could force banks and other investors to make further large write-downs on their credit market holdings, on top of the huge losses some European and US banks suffered after this summer’s credit turmoil.
Until a couple of months ago, the part of the ABX index that tracks AAA debt was trading almost at face value. However, in the past three weeks it has fallen sharply due to downgrades by credit rating agencies and bad data from the housing sector.
As a result, the so-called ABX 07-1 index – which tracks AAA mortgage bonds originated in the first half of this year – fell to a record low close of 79 on Tuesday, meaning that traders reckon these bonds are worth only 79 cents on the dollar.
The swing could create real pain for investors, the FT says, since in recent years numerous firms have created trading strategies which have loaded large debt levels onto these “safe” securities, precisely because they assumed these instruments would never fluctuate in price.
The Index has recovered slightly to close today at 81.76 cents.
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