BBB sub-prime securities holding firm...

[sniglet]

I notice that the BBB sub-prime mortgage securities have been holding steady over the last couple days. Maybe the big declines in sub-prime securities are over (BBB tranches are trading at below 50 cents on the dollar already)? Although it's hard for me to see how anyone would want to buy BBB sub-prime paper, regardless of the price. These could see 100% losses.

I did see that the higher rated paper dropped a wee bit today, with AAA now going for 95 cents on the dollar.

[TJ_98370]

..
Apparently Deutsche Bank knows how to play the ABX index game....



Deutsche Bank AG analyst Eugene Xu recognized a financial train wreck in the making two years ago when he predicted ``quite probable'' losses from the least creditworthy home loans in America's runaway property market.

Now Germany's largest bank is poised to reap a bonanza of at least $270 million and as much as $540 million from a strategy that enabled its traders to sell subprime mortgage loans with derivatives contracts that appreciated as the U.S. housing market suffered its worst slump in 16 years....

....Mortgage defaults would surge as soon as price appreciation slowed, Xu wrote in September 2005. Since then, Deutsche Bank traders, led by Greg Lippmann, sold ABX index contracts, providing 200 million euros ($272 million) of revenue in the first quarter and possibly another 200 million euros in the past quarter, assuming the position wasn't changed, said Kinner Lakhani, the top-rated banking analyst at ABN Amro Holding NV in London.....

...The traders started selling the ABX index contracts in late 2006 because they ``felt that the U.S. mortgage market was probably overheating and would potentially soften,'' Deutsche Bank Chief Financial Officer Anthony di Iorio said in May.

Deutsche Bank was among the firms that helped create the ABX.HE index in January 2006. The credit-derivatives index provides mortgage-backed bondholders with insurance against defaults on U.S. home loans. Bondholders can use the index to hedge against losses spurred by an increase in mortgage defaults or to bet on the credit quality of the debt.

Derivatives are financial instruments derived from bonds, loans, stocks, currencies and commodities, or linked to specific events like changes in the weather or interest rates.

Jain, who started his career as a derivatives strategist at Merrill Lynch & Co. and was brought to Deutsche Bank by Edson Mitchell in 1995, said earlier this month that he doesn't expect widespread panic in the subprime market.

``Most of the participants in this market are real money investors who don't employ irresponsible leverage ratios,'' he told the Financial Times on July 12. Losses are concentrated in subprime loans made in 2006, he said....
.

[sniglet]

Yet another day in which subprime securities have held their own in the ABX. I see that only the A and AA tranches lost any ground today (August 1st). This makes at least 4 trading days without any greater damage done to subprime paper.

Maybe subprime securities have finally reached a bottom?

[sniglet]

Ok. Today (August 2nd) we finally saw some more deterioration in the ABX sub-prime indexes. The AA and AAA tranches took the biggest haircut, with AAA at 92.5 and AA at 85 cents on the dollar, setting new lows. The lowst slices of BBB only inched down, touching their previous lows of a week ago.

In short, it looks like most of the pain right now is happening in the highest rates tranches.



As an aside, I seem to notice that the big stock market declines seem to happen several days after the ABX takes a big plunge. It's almost as if there is a delayed effect, to see who else is buckling under declining mortgage securities, before stocks get whacked.