7 Comments for this entry

1. John M. says:

   June 11, 2008 at 5:40 AM

   twist -

   Like Democracy, the ABX is a horrible proxy for the value of the bonds they measure, but it’s the best we’ve got. If we took seriously the implied values of the debt given by this method it would imply that every bank and financial institution in the world is catastrophically insolvent. Well, I expect they all are (that’s why there is such fear of price discovery these days ) but not quite as badly as the above would imply.

   Here’s a technical criticism of the ABX index that was posted yesterday. If you can understand what this guy is complaining about you’re doing better than me.

   “BIS Quarterly Review Deprecates ABX Benchmark for SubPrime”, James Hymas, iStockAnalysis, June 10, 2008.
2. twist says:

   June 11, 2008 at 6:26 AM

   John-

   I agree the ABX has it’s issues- like virtually every other economic indicator we have available to us.

   I don’t think we can assume the ABX gives us an accurate picture of where the bond market is at, any more than say the CPI or new home sales does. I suspect though, that the trend over time is the best we can expect over any of them.

   I don’t think the trend here looks good.
3. dogtownsurfer says:

   June 11, 2008 at 9:05 AM

   John M

   I “think” what he is saying is that the ABX looks at what could be considered (one of) the most volatile tranches in the deals that make up the index.

   Ok – but so what? When investors were buying these pools most of the senior tranches were sold to pension funds, SWFs, etc. as they wanted the safest part of these deals. Who took these “equity”, or first to take a loss, tranches? The banks themselves, and that’s where I think the index is a good indicator.

   In other words: these tranches are primarily owned by banks, banks are famously undercapitalized, if these were to hit the market they would most certainly be underbid as the market knows this is a sale of last resort, and I believe the index reflects that sentiment.

   So, maybe in the world of textbooks and academia it’s not completely accurate, but in the real world of trading and where the underlying securities might actually sell I would say it is.

   My $.02

   Igor says: No Idea
4. Tobby says:

   June 11, 2008 at 9:18 AM

   The ABX is a weighted average of about 15% of the tranches in a CDO. This is the main weakness. If you own only one tranche then you really have no idea what it is worth. Sure the bottom tranches may be worthless, but what about the middle or top tranches which make up the bulk of these investment vehicles? On top of that you don’t really know if there will be any mortgage insurance protection to back these up due to the problems with the M/I companies.

   The index, published by Markit is being expanded to include most of the main parts of an issue. However, it may take some time before these indexes achieve enough gravitas to be considered a good proxy for value.
5. jryskmpr says:

   June 11, 2008 at 11:35 AM

   Has Bill Gross made a mistake?
6. jiHymas says:

   June 11, 2008 at 9:00 PM

   Thanks for the link!

   I have updated the original post (not the one on iStockAnalyst) to make it a little less cryptic.
7. Randle says:

   June 13, 2008 at 8:46 AM

   The ABX-HE indices are pools of home equity loans, not mortgages. Still interesting.

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