The FT has been trying to get to grips with credit products in general and this week referenced a report from Creditflux, the bible in this part of the industry. Don't try and look up the original article - subscriptions cost about eight hundred pounds a year.
The nascent market in derivatives on the ABX Index, a basket of 25 large issues of bonds backed by US home equity loans (roughly equivalent to the non-conforming mortgage market in the UK) must be the Waziristan of the financial markets - an obscure and distant place where important events go on largely unreported. However, the market is growing rapidly, one of a third generation of credit derivative products, the first being the single name default swaps and the second the products trading correlation risk between credits, including baskets of the iTraxx and other credit indices.
Hedge funds and other active players have been taking big bets against the US housing market using contracts on the ABX since this time last year, traders tell me, which now seem to be paying off.
The US government statistics have shown the wilting of the US new home sales over the past six months. The markets have taken note of the knock-on effects on US housebuilders and for the profits of HSBC. However, the February CreditFlux headline "Liquidity Vanishes at ABX HE crumbles", puts some figures on the underlying market, with the ABX-1 for BBB mortgage backed securities now trading down some 10% from its initial level, equivalent to something over a 2.5% jump in yields for these bonds, depending on your assumption about their average life. No doubt, this is a strong indication of further trouble to come for the consumer and the US economy as a whole.
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