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CMBX AAA 1-5 Spreads
As the Fed is taking proactive measure to address the upcoming CRE cataclysm (as defined by WL Ross and George Soros) via gratuitous policy changes, it is useful to observe the recent market of CMBX 1-5 (2005-2007) AAA-rated trances mid-spreads. As the chart below indicates, the CMBX market may have jumped the shark on risk perceptions. CMBX 1 has dropped to sub 200 bps levels, back to pre-Lehman levels. Yet analysts are finally shifting their attention to both cumulative loss and loss severity estimates in CRE. While one may never be able to recreate the Paulson ABX trade, the current spread on CMBX may provide enough of a buffer to give the most profitable trade of the new millennium a second parallel life, based on the assumption that kicking the can down the road is not a prudent approach by the Fed and the FDIC.
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the Professor is trying to get his Mojo back after having totally missed the March/October rally
Mother of all carry trades faces an inevitable busthttp://www.ft.com/cms/s/0/9a5b3216-c70b-11de-bb6f-00144feab49a.html
Why can't the dollar go to zero?
Dollar doesn't go to zero, price of everything in dollars goes to infinity
It might not actually get to the big "0" but might get very close. Check out a currency that got hammered as a result of government printing - Angolan kwanza. When the government replaced the original kwanza with the "novo" kwanza the exchange rate was at par BUT only for 5% of face with the balance being govt bonds. Watch Zimbabwe (eventually) try a similar move. Some years ago the Burmese junta managed to dick over the people by simply replacing (at par) old notes for new (triangular as I recall) notes, with the added twist of failing to notify the entire country within the very limited exchange period, and subsequently declaring old notes as illegal tender. The generals did ok - the peasants got dicked.
Remember those AAA tranches have 50bp coupons so while the 200bps sounds 'low', the 'price' of the tranche is still low and these tranches all trade on price now...so 200 is better than 500 but way worse than 50 for Par!!
I have been watching the Nikkei, sipping on a Hot Toddy, and I was remembering some of my all-time favorite funny equity market references from ZH comments:
#1) Rut-roh.
#2) Time to take the water wings off of the Titanic.
Awesome, Thanks ZH,
Mark Beck
Great typo: "AAA-rated trances"
Moody's DJ Ratings?
what would life be without easter eggs
All the AAA cash bonds will be safely in the TALF when it happens and so it's the taxpayers that will take the hit; not sure what this all means more broadly speaking (won't save the synthetics), but just thinking out loud.
There is also a gradual cascade of repayment that is supposed to occur in these assets. That effect could be more of the reason for the decline in spreads than more risk appetite. The data series that I would like to see is the aggregate LTV or LTC series or the aggregate duration layered over the spread series. That would explain more about the spreads.
Also, the lack of trading in these assets makes the data suspect.