Saturday, February 17, 2007

Sub-Prime Mortgage Derivatives Drop for 4th Week

From Bloomberg:

A derivatives index used to bet on bonds backed by the riskiest U.S. mortgages fell for the fourth straight week as more subprime lenders reported losing money.

Prices for credit-default swaps linked to 20 securities rated BBB-, the lowest investment grade, and created in the second half of 2006 fell 2.8 percent to 82.82 this week, and are down 15 percent since being introduced Jan. 18. The decline means an investor this week would have paid more than $950,000 a year to protect $10 million of bonds against default.

The tumble is being exacerbated by hedge funds using the index to make bearish bets and a dearth of investors willing to use them to make bullish bets, said investors such as Dean Smith of New York-based Highland Financial Holdings Group LLC, which manages $2 billion including mortgage bonds. The cost to protect against default using the index was more than two-and-a-half times that to insure individual securities on Feb. 12, Bear Stearns Cos. said.

``We've yet to see the floor on where these things can go,'' said Paul Colonna, a fixed-income manager for Stamford, Connecticut-based GE Asset Management, which oversees $199 billion. ``And it's not based on housing data or performance data'' on mortgages in the bonds.

These bonds were recently introduced -- as in about a month ago. Since then they have only decreased in value. The only people buying these bonds are short sellers. No one appears to be bullish right now. In addition, there is no market floor on these bonds. Some of this is due to their lack of a trading history. But when a chart is solidly trending in one direction, traders will follow the trend until it stops. Then some traders will hold on to their positions to see if the trend is simply taking a break. In other words, this market could go down for awhile.