Promoters of the tranched ABX index TABX are looking for ways to inject pricing stability by bringing in natural buy-and-hold investors. One suggestion being floated is to include tranches of the ABX in a more diverse collateralized debt obligation. Combining an ABX tranche with an unlevered CDO could prove an attractive structure, said one buy-side account manager currently on the sidelines.
In the first two weeks of trading, ABX tranche prices have reflected buying and selling interest more than fundamentals such as the level of credit support in a tranche. There has been a negative correlation slope in the top tranches, indicating the market expects losses to be very high. "The negative correlation slope for the first four tranches is the most glaring example of the "take the money and run" mentality of the current trading environment," said Brian McManus, senior strategist in the structured products group at Wachovia Securities. "If spreads tighten and that's a very big if, correlation should flatten and the 15-25 and 25-40 tranches have the most to gain," he added.
Some real-money investors started to buy into the market in small bites last week at the super-senior level given that technicals currently favor them. To provide stability until interest from these investors picks up, however, market makers have been buying senior protection. "Right now dealers are willing to buy protection on the 40-100% tranche of the BBB portfolio at spreads close to 80 basis points. These are expected to be rated AAA and have higher carry than traditional AAA tranches," noted one trader.
