Volatility in asset-backed securities is drying up liquidity and driving bid-ask spreads wider across the single-name ABS credit-default swap market, some were as wide as 50 basis points last week. A spate of bad news reports for the sub-prime mortgage industry has driven the widening and it's exacerbated by the fact ABS trading is dominated by two different camps of investors: long-term mortgage portfolio managers and shorter-term hedge fund players.
Allan Berliant, portfolio manager at asset management firm GMO in Boston, said hedge funds are "having the biggest impact on the market [and] don't always understand the impact of seasoning on pool delinquencies and their short-term trades are not necessarily research based." Buyers and sellers in the market have different views on its direction, hence the wide bid-ask spread compared with corporate credit where the difference between buying and selling protection is usually a few basis points for investment-grade credits.
