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| David Heike |
Lehman Brothers is planning to introduce a floating-rate component to its widely followed asset-backed index later this year, according to David Heike, senior v.p. and head of the asset-backed strategy group, who spoke on a panel of research analysts. He says the move will make the index better replicate the market, where a majority of the bonds sold last year were mortgage-related, and thus variable-rate. It will also offer investors a better yardstick with which to compare their own performance. Currently, the index only includes fixed-rate bonds and by doing so misses 80% of the market, he estimates. "It's a big shortcoming of our index," Heike acknowledges.
Alex Roever, managing director and head of structured debt research at Banc One Capital Markets in Chicago, noted the benchmarks, referring also to Merrill Lynch's ABS index, do not accurately reflect the securities available to investors. For example, manufactured housing bonds, while they are scheduled to become a smaller part of the Lehman index given recent downgrades of nearly $2 billion in Conseco Inc. paper (BW, 1/19), will still constitute a large part relative to the amount of paper that was sold last year. He says these distortions can cause fluctuations in pricing as managers seek to reduce their basis risk.
