Bank of America Merrill Lynch analysts in a report released yesterday referred to Markit’s iBoxx European ABS index as a “useful tool” in benchmarking and in comparing ABS to other asset classes.
"While we recognize that data for individual issue is often illiquid, we think that by measuring over a large number of issues the iBoxx indices offer a good benchmarking tool for investors and some needed transparency for trustees and asset allocators," analysts wrote. They added that although unexpected, the trading or structuring swap or ETF type products has been done for other iBoxx indices.
The indices, analysts added, allow users to have a measure of volatility. However, they said that the Eurozone index is probably a fairer indicator of volatility given that it is affected by foreign exchange and it is in line with corporate bond indices that are usually constructed based on the bonds' currency denomination.
"Despite being the asset class at the epicentre of the credit crisis and underperforming corporate and covered bonds, the volatility of the broad Eurozone index (which includes all ratings) lies between corporate and covered bonds and are all very low in comparison to equities," analysts said.
Another tool provided by Markit, and detailed in the BofA Merrill report, is an index calculator. The report said that the optional fields are the following: the asset class, country, and rating and currency of the bonds.
Floating-rate bonds, sinking funds and amortizing bonds, fixed-to-floater bonds (only after the switch to a floating rate coupon), and tap issues were all listed as eligible bonds.
Markit’s new venture was designed as a “cash bond index designed to track the performance of the European floating-rate ABS market.”
The index offers eight standard sub-indices to euro, British dollar, and U .S. dollar investors, which, according to BofA Merrill include: ABS, RMBS, 'AAA' Dutch RMBS, 'AAA' Spanish RMBS, 'AAA' prime RMBS, AAA nonconforming RMBS, U .K . CMBS, and CMBS.
Eligible bonds under the index include: floating-rate bonds, sinking funds and amortizing bonds, fixed-to-floater bonds and tap issues. Fixed-rate and fixed-to-floater bonds in the fixed coupon time period are not part of the index.
The list of eligible ABS types is limited to those standard types common in the market. Complex structures including CDOs are not eligible, although ABS issued by SPVs fall under the iBoxx. The originating entity has to be domiciled in Europe and the bonds that are rated 'CC' or higher should be denominated in euro, British pounds and U.S. dollars.
To be part of the index, triple-A securities must be at least 500 million in local currency and 30 million for those double-A and below.