The asset-backed securities index ABX continues to rally as dealers report that bearish investors are unwinding their short positions to take some profits. The BBB minus 07-01 index is trading at least four points higher this week, between 70% and 74%, compared with 66% last Wednesday.
These investors, mostly macro hedge funds, are covering short positions on the underlying asset backed securities by transferring from buying protection to selling protection on the BBB and BBB minus parts of the index.
Some dealers suggested trading gains from this strategy are being used to pay for losses in other markets. Others, however, reported that several investors that use the index to hedge their cash mortgage exposures, including mortgage originator Countrywide Capital Markets, were buying back their shorts with the intention to put them back on when levels are higher. Officials at Countrywide did not comment by press time.
