Today was the first trading day of the new series of ABX.HE index. Let’s look closer.

I will concentrate on ABX-HE-AAA 07-2 – after all the “AAA” rating performance is the most important. Every new tranche starts trading exactly at 100 and the coupon is selected at the open. After that coupon is fixed and price fluctuates. If the price is 100% it means no money change hands when the insurance is sold. If the price is, say, 90% then the insurance seller gets 10% of the bond price when the contract is signed and then paid the coupon.

The coupon on ABX-HE-AAA 07-2 was set at 76 bp, which is 8 times more than the 9 bp coupon on older ABX-HE-AAA 07-1. So, for a bigger coupon the CDS has to perform well? The website is giving conflicting quotes – it’s either 99.33% or 95.23%. If the later is correct then it’s smells bad for underwriters. We’ll see tomorrow.