The new residential mortgage-backed securities index ABX has encountered some unexpected snags due to an imbalance of buyers and sellers. Banks, hedge funds and collateralized debt obligation managers are all shorting single names and selling protection on the index, but there is little flow on the other side. This has led to a compression of spreads on popular names. "Dealers would like to hedge their inventory using the index," said Brian McManus, head of CDO research at Wachovia Securities. "But you need a balance of buyers. It's not a hedge if they don't trade together."
"The expectation was that there would be an unlimited opportunity to sell protection on everything," said Douglas Lucas, director in CDO research at UBS. "It looks like it is not going to be as great an opportunity as expected." Panelists noted, however, the ABX has only been trading two months and corporate indices took time to get going. Over time, different vintages could provide liquidity as they have with the CDX.
