Alea today on the subject of the notorious ABX subprime indices. We’ve been
here before, many times, but no one ever seems to learn: the ABX indices do
not measure bond prices. They do not give an indication of
what subprime-backed bonds are worth in terms of cents on the dollar. If the
triple-A ABX index is at 79, that does
AAA tranches of CDO trade at, or are worth, 79 cents on the dollar.
What’s more, the ABX tranches always refer to the weakest tranche
of any given bond. They are also much less liquid than you might think: Alea
provides the bid-ask spreads, which are a minimum of 8 points on the
most recent series. (Interestingly, the older, "off-the-run" series
seem to be more liquid, weirdly enough.)
And none of this matters much in any event, since, as Alea tells us:
will soon be dead, according to analysts at Wachovia only 3 deals qualify
for the next roll in january (20 are needed).
The ABX remains, for all its faults, the best and most transparent instrument
we have for valuing subprime debt. But its weaknesses are legion, and maybe
its disappearance might help prevent a lot of lazy thinking and journalism.