Signs of improvement - ABX & CMBX indices

As I posted on Thursday, Markit's ABX and CMBX indices have been strong this past week, with both indices pulling back before reaching the extreme levels reached last November.

Markit's AAA ABX indices appeared to have made a higher low last week, but after nitially advancing, have paused. Still, these indices are showing positive divergence to SPX. Here's Markit's AAAA 07-2 series, with SPX (from Stockcharts) superimposed in green



Similar story with Markit's CMBX indices, although these indices have continued to improve all week. Here's Markit's CMBX AAA 4 index (which shows price). I've superimposed the inverse of SPX in blue. Again, note the divergence.

Signs of improvement

While the bad news has been relentless these past few weeks, there have been signs that a recovery is just around the corner. Numerous correlational indicators have improved markedly since New Years, even in the face of the weakness in equities these past two weeks. These indicators include:

A huge decline in the A2/P2 spreads in 2009 (Calculated Risk) indicating that credit is beginning to flow again;

An increase in M3 Money Supply, indicating that the Fed's efforts to reinflate are getting traction;

An increase in 10 year Treasury yields, indicating an increase in risk appetite;

Bullish moves in silver and crude, silver in particular has been tightly correlated to SPX;

A weekly drop in the cash holdings of money market mutual funds, which might indicate that cash on the sidelines is coming back into the markets;

Continued improvement in the BDI, suggesting that global trade is starting to recover;

And strength in Markit's ABX and CMBX indices, again measures that are correlated to SPX.

All this is bullish for equities, although some indicators are becoming overbought (like TRIN from Matt Trivisonno)

Markit Indices are bullish

While the financial sector imploded over the weekend, both the asset-backed and commercial mortgage backed bonds seemed to have turned a corner last Thursday, at least according to data provided by Markit

This should bode well for equities, as both of these markets are highly correlated with stocks.

Here's Markit's commercial mortgage backed AAA bonds index -- node th spreads have been pulling back since last week




And here's Markit's asset-backed AAA bonds index -- prices have rallied since last week.



For reference, here's SPX over the same timeframe

Fed starts buying MBS paper, Markit's ABX indices drop

Alea (a great credit-side blog) posted today that the Fed purchased $10.2 Billion of Mortgage backed securities. This move was pre-announced by the Fed and not a surprise. What surprises me though, is that asset-backed bond prices took a dive today.

Here's Markit's AAA 07-1 ABX index (which includes mortgage backed securities (from Markit's website)). Prices were off 10% today, a drop reflected in all of Markit's ABX-AAA indices.


Another example of buy the rumour, sell the news, but this time in the MBS market?

I wonder if this drop will have wider implications, especially given the good correlation between the ABX indices and equities in general -- here's SPX over the time period as the above Markit chart


Or maybe the drop in stocks precipitated the drop in ABX?

UPDATE: John Jansen, over at Across the Curve, came up with a succinct explanation of why the ABX indices sold off yesterday.

January 8th, 2009 10:01 pm

... it appears that a bill to allow bankruptcy judges to alter loan balances has picked up a head of steam as Citibank broke ranks with other lenders and no longer opposes the measure.

Dealers report heavy trading in the various ABX tranches today and lots of cash selling. AAAs were down more than three points and some Penultimate tranches dropped over 4 points.

It would appear that the models by which some of this detritus trades does not have a variable for judicial fiat.