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ABX Indexes Tied to AAA Subprime Bonds Tumble, Fund Liquidat

Discussion in 'Financial Cents' started by hacon1, Feb 27, 2008.

  1. hacon1

    hacon1 Monkey+++

    ABX Indexes Tied to AAA Subprime Bonds Tumble, Fund Liquidates

    By Jody Shenn and Sarah Mulholland

    Feb. 27 (Bloomberg) -- Most Markit ABX indexes tied to subprime-mortgage bonds plummeted to new lows on speculation a hedge fund is being liquidated.

    An index of credit-default swaps tied to 20 subprime-loan bonds rated AAA when created in the first half of last year fell 2.6 percent to 60.33, down from 74.18 at the beginning of the year, according to administrator Markit Group Ltd. The ABX-HE- AAA 06-2 index tied to AAA rated bonds from the first half of 2006 fell 4.8 percent to 73.43, down from 87.30 on Jan. 2.

    The hedge-fund liquidation has ``been weighing on the market,'' according to a note to clients from Zurich-based Credit Suisse Group.

    Hedge funds, private and largely unregulated pools of capital, can be forced to liquidate when they've borrowed money against their holdings and can't meet margin calls as their prices decline.

    ABX indexes indicate prices for credit-default swaps linked to 20 bonds. The swaps offer protection if the securities aren't repaid as expected, in return for regular insurance-like premiums.

    All but three of the 20 ABX indexes finished at new lows today, indicating prices of the underlying debt also fell in value. The declines signal more writedowns may be ahead for banks and other investors who own subprime-linked debt. The world's largest banks have reported more than $160 billion of mortgage-related writedowns and losses, mainly stemming from investments linked to mortgages to people with poor or limited credit.

    The indexes tumbled last year from at or near 100 as investors bet rising defaults on home loans would continue.
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