Post by jeffolie on Feb 16, 2007 22:06:12 GMT -6
Subprime Mortgage Derivatives Tumble for a Fourth Straight Week
By Jody Shenn
Feb. 16 (Bloomberg) -- A derivatives index used to bet on bonds backed by the riskiest U.S. mortgages fell for the fourth straight week as more subprime lenders reported losing money.
Prices for credit-default swaps linked to 20 securities rated BBB-, the lowest investment grade, and created in the second half of 2006 fell 2.8 percent to 82.82 this week, and are down 15 percent since being introduced Jan. 18. The decline means an investor this week would have paid more than $950,000 a year to protect $10 million of bonds against default.
The tumble is being exacerbated by hedge funds using the index to make bearish bets and a dearth of investors willing to use them to make bullish bets, said investors such as Dean Smith of New York-based Highland Financial Holdings Group LLC, which manages $2 billion including mortgage bonds. The cost to protect against default using the index was more than two-and-a-half times that to insure individual securities on Feb. 12, Bear Stearns Cos. said.
``We've yet to see the floor on where these things can go,'' said Paul Colonna, a fixed-income manager for Stamford, Connecticut-based GE Asset Management, which oversees $199 billion. ``And it's not based on housing data or performance data'' on mortgages in the bonds.
Falling prices for the ABX-HE-BBB- 07-1 contracts, and ones tracked by other ABX indexes, accelerated last week, as the two biggest subprime home lenders, HSBC Holdings PLC and New Century Financial Corp., said more of their loans were going bad than they expected. Subprime mortgages are made to borrowers with low credit scores or high debt burdens. New subprime loans are experiencing more delinquencies than in at least six years.
`Pure Sentiment'
ABX indexes plunged last week even as typical yield premiums on BBB- bonds remained at about 3 percentage points over the one month London interbank offered rate, according to RBS Greenwich Capital Markets. Typical swap premiums on a single bond rose by $50,000 per $10 million to $400,000, versus a $235,000 rise for ABX premiums to $918,000, according to Barclays Capital.
In the ABX market, ``almost the entire price movement can be blamed on nothing other than pure sentiment-driven selling,'' Bear Stearns analysts led by Gyan Sinha in New York wrote in a Feb. 12 report. Sinha says some of the contracts are too cheap.
Yield premiums on low-rated subprime bonds have widened in the past five months. Spreads on BBB- bonds sold this week were half percentage point higher than for ones sold last week, averaging 3.50 percentage points, the highest since late 2005, Michael D. Youngblood, an analyst at Friedman Billings Ramsey Group, wrote in a report today. Prices on low-rated bonds from the many of the deals weren't disclosed, he wrote.
Spreads on older BBB- bonds widened to 4.25 percentage points today, the highest since December 2005, said Peter DiMartino, a managing director at RBS Greenwich Capital Markets.
San Diego, California-based Accredited Home Lenders Holding Co. said Feb. 14 that it lost money last quarter and it couldn't provide earnings guidance for this year. Also this week, closely held ResMae Mortgage Corp., which filed for bankruptcy protection, and Fieldstone Investment Corp. announced sales.
New Indexes
New ABX indexes are created every six months by a group of securities firms including Bear Stearns, Deutsche Bank AG, and Goldman Sachs Group Inc., and London-based Markit Group Ltd.
They indicate prices for default swaps linked to 20 bonds, not prices for swaps on each. The default swaps provide monthly payments to sellers of bond protection and payments to buyers when the securities aren't repaid as expected.
Managers of collateralized debt obligations and other funds with experience in bonds usually use so-called single-name swaps and actual securities to make bullish bets to zero in on the best ones, said Andrew Chow, who manages $6 billion in asset-backed bonds and their derivatives at SCM Advisors LLC in San Francisco.
Last year, ``a lot of dealers bought protection in the single-name market to feed the CDOs and subsequently bought the index as a hedge,'' said Roy Cantu, director for trading of asset-backed bonds and related derivatives at Barclays Capital.
``I think the dealer community may have learned that this hedge did not quite work,'' he said.
Hedge Funds
Hedge funds that make bets using a variety of assets based on views of the economy's direction have made the ABX market their ``vehicle of choice'' to bet against housing and mortgage markets, said Scott Kupchinsky, a portfolio manager and lead subprime analyst at pension fund manager TIAA-CREF in New York.
Stock investors using ABX indexes to hedge positions or those that might sell short shares of subprime lenders add another ``unusual burden of selling pressure,'' Friedman Billings' Youngblood said in an interview last month. A short sale entails selling borrowed securities in the hopes of profiting by acquiring them at a lower price later.
More lenders may be using ABX contracts to protect against falling values for loans they plan to sell, according to RBS Greenwich. Securities firms also appear to be using more to hedge against drops in the value of CDO they create, said Greg Lippman, head of asset-backed trading at Deutsche Bank.
By Jody Shenn
Feb. 16 (Bloomberg) -- A derivatives index used to bet on bonds backed by the riskiest U.S. mortgages fell for the fourth straight week as more subprime lenders reported losing money.
Prices for credit-default swaps linked to 20 securities rated BBB-, the lowest investment grade, and created in the second half of 2006 fell 2.8 percent to 82.82 this week, and are down 15 percent since being introduced Jan. 18. The decline means an investor this week would have paid more than $950,000 a year to protect $10 million of bonds against default.
The tumble is being exacerbated by hedge funds using the index to make bearish bets and a dearth of investors willing to use them to make bullish bets, said investors such as Dean Smith of New York-based Highland Financial Holdings Group LLC, which manages $2 billion including mortgage bonds. The cost to protect against default using the index was more than two-and-a-half times that to insure individual securities on Feb. 12, Bear Stearns Cos. said.
``We've yet to see the floor on where these things can go,'' said Paul Colonna, a fixed-income manager for Stamford, Connecticut-based GE Asset Management, which oversees $199 billion. ``And it's not based on housing data or performance data'' on mortgages in the bonds.
Falling prices for the ABX-HE-BBB- 07-1 contracts, and ones tracked by other ABX indexes, accelerated last week, as the two biggest subprime home lenders, HSBC Holdings PLC and New Century Financial Corp., said more of their loans were going bad than they expected. Subprime mortgages are made to borrowers with low credit scores or high debt burdens. New subprime loans are experiencing more delinquencies than in at least six years.
`Pure Sentiment'
ABX indexes plunged last week even as typical yield premiums on BBB- bonds remained at about 3 percentage points over the one month London interbank offered rate, according to RBS Greenwich Capital Markets. Typical swap premiums on a single bond rose by $50,000 per $10 million to $400,000, versus a $235,000 rise for ABX premiums to $918,000, according to Barclays Capital.
In the ABX market, ``almost the entire price movement can be blamed on nothing other than pure sentiment-driven selling,'' Bear Stearns analysts led by Gyan Sinha in New York wrote in a Feb. 12 report. Sinha says some of the contracts are too cheap.
Yield premiums on low-rated subprime bonds have widened in the past five months. Spreads on BBB- bonds sold this week were half percentage point higher than for ones sold last week, averaging 3.50 percentage points, the highest since late 2005, Michael D. Youngblood, an analyst at Friedman Billings Ramsey Group, wrote in a report today. Prices on low-rated bonds from the many of the deals weren't disclosed, he wrote.
Spreads on older BBB- bonds widened to 4.25 percentage points today, the highest since December 2005, said Peter DiMartino, a managing director at RBS Greenwich Capital Markets.
San Diego, California-based Accredited Home Lenders Holding Co. said Feb. 14 that it lost money last quarter and it couldn't provide earnings guidance for this year. Also this week, closely held ResMae Mortgage Corp., which filed for bankruptcy protection, and Fieldstone Investment Corp. announced sales.
New Indexes
New ABX indexes are created every six months by a group of securities firms including Bear Stearns, Deutsche Bank AG, and Goldman Sachs Group Inc., and London-based Markit Group Ltd.
They indicate prices for default swaps linked to 20 bonds, not prices for swaps on each. The default swaps provide monthly payments to sellers of bond protection and payments to buyers when the securities aren't repaid as expected.
Managers of collateralized debt obligations and other funds with experience in bonds usually use so-called single-name swaps and actual securities to make bullish bets to zero in on the best ones, said Andrew Chow, who manages $6 billion in asset-backed bonds and their derivatives at SCM Advisors LLC in San Francisco.
Last year, ``a lot of dealers bought protection in the single-name market to feed the CDOs and subsequently bought the index as a hedge,'' said Roy Cantu, director for trading of asset-backed bonds and related derivatives at Barclays Capital.
``I think the dealer community may have learned that this hedge did not quite work,'' he said.
Hedge Funds
Hedge funds that make bets using a variety of assets based on views of the economy's direction have made the ABX market their ``vehicle of choice'' to bet against housing and mortgage markets, said Scott Kupchinsky, a portfolio manager and lead subprime analyst at pension fund manager TIAA-CREF in New York.
Stock investors using ABX indexes to hedge positions or those that might sell short shares of subprime lenders add another ``unusual burden of selling pressure,'' Friedman Billings' Youngblood said in an interview last month. A short sale entails selling borrowed securities in the hopes of profiting by acquiring them at a lower price later.
More lenders may be using ABX contracts to protect against falling values for loans they plan to sell, according to RBS Greenwich. Securities firms also appear to be using more to hedge against drops in the value of CDO they create, said Greg Lippman, head of asset-backed trading at Deutsche Bank.