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ABX Rallies On Short Covering

The asset-backed securities index ABX continued its rally last week as dealers reported that bearish investors were unwinding their short positions to take some profits.

The asset-backed securities index ABX continued its rally last week as dealers reported that bearish investors were unwinding their short positions to take some profits. The BBB minus 07-01 index was trading at least four percentage points higher early last week, between 70% and 74%, compared with 66% the previous Wednesday.

These investors, mostly macro hedge funds, were covering short positions on the underlying ABS 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 were being used to pay for losses in other markets from two weeks ago. 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.

 

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