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ABX, RIP
Required reading from Alea today on the subject of the notorious ABX subprime indices. We've been here before, many times, but no one ever seems to learn: the ABX indices do not measure bond prices. They do not give an indication of what subprime-backed bonds are worth in terms of cents on the dollar. If the triple-A ABX index is at 79, that does not mean that AAA tranches of CDO trade at, or are worth, 79 cents on the dollar.
What's more, the ABX tranches always refer to the weakest tranche of any given bond. They are also much less liquid than you might think: Alea provides the bid-ask spreads, which are a minimum of 8 points on the most recent series. (Interestingly, the older, "off-the-run" series seem to be more liquid, weirdly enough.)
And none of this matters much in any event, since, as Alea tells us:
The ABX will soon be dead, according to analysts at Wachovia only 3 deals qualify for the next roll in january (20 are needed).
The ABX remains, for all its faults, the best and most transparent instrument we have for valuing subprime debt. But its weaknesses are legion, and maybe its disappearance might help prevent a lot of lazy thinking and journalism.
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