The ABX.HE plummeted last week to all-time lows amid unrelenting news of issuers pulling out of the subprime mortgage market and the sour performance of loans originated in 2006. The activity - most dramatic in the triple-B tranches of the index's second series - comes on the heels of this week's emergence of the third ABX.HE series.
Contributing to the decline, CDOs were rumored to be slacking from their usual position at the other end of hedge fund sentiment. "It would appear as though SF CDO managers are finally starting to come to terms with the gravity of the collateral credit situation and that their market-forced focus on top-tier assets, many of which trade at non-arbitrage levels, is limiting their ability to respond to overall spread widening," JPMorgan Securities analysts wrote last week. They predicted that the second ABX index will continue to underperform, maintaining last week a spread target for ABX.HE 06-2 triple-B-minus at 585 basis points.