Thursday, April 24, 2008

ABX: Nothing can stop that now...

I've written recently that liquidity in the market is improving. Ultimately this will help pull us out of our current recession. Without liquidity, lending would never recover, and therefore housing would never recover. With liquidity, time will eventually bring both back to normal levels.

But lest you think I'm some dead brained bull, please understand that everything isn't OK. Look at the ABX indices, and notice how many of those prices are basically at their all-time lows. We've seen everything from credit to municipals to agency MBS show substantail improvement, but the good vibrations don't extend to home equity CDS.

That's because the improvement in other bond sectors reflects a recovery in liquidity. But liquidity isn't the problem in subprime lending. That's especially true for the A and BBB-rated portions of the ABX (which, by the way, is based on original rating). The BBB portions will pay some interest cash flow from here on out, but that's about it. Forget about principal. And that's not going to change. There will be a continued erosion of the ABX BBB prices as those lingering interest payments are made.


Prepare4L said...

has liquidity really imporved or has the fed just consigned its balance sheet for a game of hot potato? Confusing the two leaves you on CNBC. Shuffling a bunch of paper in the short term only means that the you have pushed the horizon. The normal that everyone alludes to was anything but normal. So returning there is simply fantasy. Equity rally on the back of think volumes and a $75B auction is hardly a reaosn to get excited.

eh said...

Without liquidity, lending would never recover, and therefore housing would never recover.

Since debt is often sold, e.g. MBS, I would expect that tanking ABX indexes would also mightily influence any "recovery".

And since LIBOR is predicted to rise, I don't see that liquidity has significantly improved. For an explanation of that, see the aforementioned tanking ABX indexes.

Accrued Interest said...

Look... I'm telling you guys, the bid/ask on bonds is drastically tighter today vs. 2 months ago. That's the definition of liquidity.

The continued poor performance of the ABX contrasted with strong performance from other products, indicates that value is being separated out. Some stuff is good, other stuff is bad, and the market is starting to price it that way.

The ABX is an index of low quality home equity paper. Not MBS.

PNL4LYFE said...

Liquidity is much better than it was in March on most products. No, it will probably never get back to the 'normal' of early '07, but it doesn't have to. Flows aren't exactly orderly yet, but at least now things gap in both directions instead of just gapping wider.

From what I hear, one exception is the interest rate swap market where the recent concerns over LIBOR have made things rather illiquid. But swap spreads are well off the wides which must be a good thing.

Anonymous said...

Accrued you're an idiot. Liquidity is not the problem, Solvency is the problem.

Anonymous said...

Liquidity is a minor issue compared to Solvency and Trust.

urbandigs said...

anon - liquidity is important for the credit markets to return to some semblance of normalcy.

With a liquid marketplace, at least some toxic waste can be traded. However, I would use much caution that the liquidity we are seeing in the past 5-6 weeks, is in fact short covering in the credit markets.

There were and still are tons of shorts in the credit markets, and when fed intervened with JPM & BSC deal, they eliminated a risk that many short positions were betting on.

I agree with the solvency issues, but liquidity in the credit markets, whether it be short covering or actual money being put to work in a distressed marketplace, can only help. With that said, I am still holding my shorts, because as you said, solvency is an issue and I agree and this will be a consumer led recession.

gramps said...

I have been saying for a very long time that the real issue is solvency (and while I haven't said so, I agree trust goes hand in hand). Liquidity, in limited areas it might exist, is a symptom of the insolvency problem. You don't lend money to people who you don't believe will pay it back. And when it becomes obvious that many people are cooking the books (often with the Fed's help) -- it destroys trust and makes EVERY asset (even the so-called "good ones") questionable. Its an insolvency problem, continuously made worse by a failed Federal Reserve system.

That said, I hope Anon 11:21 is a one time visitor to this blog. I strongly disagree with AI about liquidity being an issue -- but I keep coming back and posting because I respect his opinion even when I disagree with it.

If you feel very strongly that AI is not playing with a full deck, then you shouldn't waste any time reading his blogs. There are thousands of other blogs you could read instead.

Whatever you decide to do, I hope this blog doesn't degrade to the sorts of things you often see on Yahoo. Attack AI's ideas all you want, but please refrain from attacking the person