Marketwatch just published the human-readable explanation of ABX.HE indexes. Let take the example to illustrate:
The very important and actively securitized investment-grade tranche of mortgage-backed securities is protected with CDS paper named ABX-HE-A 07-1. “A” is investment grade, which is in the middle of spectrum offered by ABX. “07-01” means mortgages were sold in H2 of 2006. The graph is here:
Current price means that protection buyer will need to pay the protection seller 7.5% upfront and then 0.64% per year. This kind of mortgage yield about 6.5%, so upfront charge is more than the paper yield per year.
Do you want to see another scary graph? This one:
It’s ABX-HE-A 06-2, also investment grade.
Let’s make a conclusion now. The subprime market is stalled. All BBB and BBB- papers from both H1 and H2 of the last year require from 25% to 30% of upfront payments to protect them. This is impossible, nobody’s gonna pay that. The subprime market is dead.
The investment grade “A” papers require 7.5% payment. It’s horrible, but still possible. The prime market is in major trouble.