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The new penultimate ABX
Worth reading. Saskia Scholtes in the FT mulls over the new addition to the ABX, the Penultimate AAA ABX.
The new sub-index will allow investors to bet on a recovery for the highest rated bonds, amid growing consensus that triple A subprime securities are underpriced. The so-called “penultimate triple A” sub-index will add a new, more senior, triple A slice to the existing five sub-indices.
The relative seniority of the bonds referenced in the new index doesn’t relate to losses - they are the second to last tranche for distribution of principal in their deals. As losses rise through the capital structure, they will hit the various principal repayment tranches pro rata. But as prepayments come in, they flow through the principal distribution tranches in order.
Bank of America summarises how things ended on Wednesday, right.
Across the Curve also considers the launch.
The trade du jour appeared to be buying the Pen AAA 07-1, 07-2 and 06-2 versus the last cash flow AAA pieces in the same deal.
Related links
ABX index looks to find some of its old spark - FT.com
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