On Friday, Zero Hedge broke the story of the "next ABX", in the form of PrimeX, or the game of jumbo prime whack-a-mole. It appears that was indeed the beginning. Here is today's update from Morgan Stanley in a market which had gone suspiciously silent since our post, and has now gotten quite vocal again with a vengeance.
From MS sales:
On a day where most macro indices point to bullish sentiment, PRIMEX is getting clobbered again. Last week, it felt like px action was driven by dealers hedging cash inventory/unwinding index longs, with retail providing a bit of a short-covering bid. Today, however, it seems that the short-covering bid has gone silent, and the marginal buyer can't be located under his desk. Given the move in ABX over the past few weeks, and the high (2 premium tranches!) $px in PRIMEX makes it an appealing target for both hedging and new entrants to the space setting shorts. One "risk sentiment neutral" trade we like here is the ARM1 vs. ARM2 steepener, as you pick up 5c of CE and 12% less DQ for ~11 points. With ARM2 already taking losses, anyone looking at the product (from the short side) for the first time might be attracted to the less negative carry implied by that tranche, against the 2-3 year multiple you achieve in ARM1s to a 5-8% writedown in those. Outright, however, until we see retail come in to set new longs, it's look out below in PRIMEX. We have traded ~250mm on the day.
the actual markets:
Cpn Bid Offer Chg from Close Factor
PrimeX.FRM.1 442 103-16 / 104-16 -0-120 0.47
PrimeX.FRM.2 458 93-16 / 94-16 -0-206 0.49
PrimeX.ARM.1 442 99-08 / 100-08 -0-223 0.41
PrimeX.ARM.2 458 88-08 / 89-08 -1-152 0.44