The PrimeX indices experienced a sharp dip in October that drew a lot of attention.
However, securitization analysts said that the market fundamentals do not justify the recent price declines.
Over October the four PrimeX indices have fallen 6% to 10%, while the Standard & Poor's 500 Index has gained 11%.
Deutsche Bank reported figures comparing price dips from Oct. 13 to Oct. 14.The bank said that the ARM.1 price dropped to 96.13 on Oct. 14 from 102.44 on Oct. 13; the FRM.1 price decreased to 99.69 from 106.17; the ARM.2 price dipped to 84.13 from 92.93; and the FRM.2 price dropped to 89.31 from 97.81.
"We find it very difficult to reconcile the magnitude of the decline in prices with a potential pricing in of worsening fundamentals," Bank of America Merrill Lynch analysts said. "The price drop is too large to be simply that. In fact, based on current pricing, the PrimeX indices still appear a bit overvalued to us, based on cash bond pricing and comparable high yield index pricing."
According to BofA Merrill analysts, the dip of eight points in the index suggested an excessive deterioration in collateral performance.
"An instantaneous drop represents protection sellers demanding an incremental eight points of payment upfront to account for an incremental eight points of write-down present value, representing an expected incremental 10-11 points of write-down in, for instance, five years," analysts said.
Market analysts also pointed out that the indices are much smaller since there are no new securities going into them.
For those that track these indices and make a relative position based on those trades, finding pricing on assets has been a challenge.
"Investors have to do some relative measure of performance but the amount of ABS paper is so much less than it's ever been before," a market analyst said. "Part of the reason that the indices are shrinking is because there are no new securities going into them."
An investor source speaking at the recent Information Management Network ABS East 2011 event in October said that the lack of gauge for pricing limits his ability to do business in the securitization market.
"There are bonds I cannot buy because I cannot price them," he said. "More and more it's like dealing with distressed high yield bonds - you have to go to each bond and do the work."
BofA Merrill analysts said that for now the top concern from investors continues to be liquidity, particularly in the distressed sectors.
In many cases, the bid/ask spread is three points between investors on bonds priced in the 30s, 40s and 50s. Many bonds are off 50% in price from their pre-summer highs.
"I think the flows are not huge (compared to what they used to be in the old days), and I can tell you that true Prime IG cash flows are still very well bid from real money players (and the supply is anemic in that space)," Jesse Litvak, managing director at Jefferies & Co. "With that being said, it does start to get the attention of people when its talked about on Web sites and blogs, and those indices are all hedge fund and Street all the time."
