The subprime mortgage market, stuck in a frenzied fall from popularity that began in full force several weeks ago, is generating all sorts of concerns among portfolio managers, dealers and broader financial market professionals. After last Tuesday's widespread sell off in just about everything except Treasuries, portfolio managers and traders alike want to know when the bloodletting will stop and whether they are next in line to feel the same kind of pain.
Market sentiment was negative heading into last week, and after Tuesday's sell off, some market players are wondering whether it was one-day anomaly or a long-term repricing of the market as a whole.
The ABX.HE 2007-1 shed five points from its value during last Tuesday's blowout, as it barely came off of a 14-point drop during the previous week. Although the ABX compensated for that on Wednesday, somewhat, with a nine-point rebound, no one can tell where fair value is or how long it will take for subprime to get back there, said one market observer. This brings us right back to the main problem with current subprime mortgage performance: the current models that dealers used to price and sell the subprime mortgage deals were generally predicated on yearly HPA of between 5% and 15%. That is not likely to materialize for a long time.
"There has been a general recognition that subprime will not perform according to beliefs that were held widely as of a year ago," one market observer said. "Nothing will cure this index. There are a lot of loans that never should have been made, and those are going to cause trouble. The question is where does it stop?"
Look for ABX levels to plane out at around 50 or 60, say some, owing to a sluggish HPA outlook and credit tightening that will make refinancing difficult for some consumers.
Compounding the problem, ABS investors are leaving a lot of supply on the table, preferring to huddle with their portfolio managers and reassess their holdings instead of buying more bonds. This supply overload, say some market participants, is driving the bulk of spread widening.
Essentially, then, everyone except the most savvy distressed debt buyers, hedge fund and CDO managers appears to be saying: Sorry, subprimes -especially those in the triple-B set - you're on your own.' That being said, contagion risk is not shaping up to be a problem for non-mortgage ABS assets, and early indications are that investors holding triple-A rated subprime mortgages are similarly likely to survive the relentless pounding in the ABX index.
Tuesday's horrors did not, however, pressure fixed-rate spreads on credit cards and autos. Nor did the pessimistic sell off stop two student loan ABS deals from pricing the same day. Handled by UBS, the $628 million Northstar Education Finance and $700 million offering from College Loan Corporation Trust's both priced their triple-A rated, 12-year bonds at 10 basis points over the three-month Libor.
Among credit cards, Capital One Multi-Asset Execution Trust priced a $175 million, three-year deal at 7.5 basis points over the one-month Libor. Credit Suisse led that deal.
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