TABX rocks the house

JabairuStork · Post by **JabairuStork** » Mon Feb 19, 2007 1:33 am

I'm pretty sure at least a couple of big dealers got seriously crossed this week on the debut. I'm talking like many points crossed. And this is despite guys making markets as wide as 10 points. Just about every hedgie I deal with was too busy to look at plain vanilla correlation stuff because they were spending all day arbing the TABX market.

It made me wish I was in a hedge fund seat - a lot of free money being given away. I noticed that several guys changed their runs so that all prices were indicative only. (I think that's lame - if you're not gonna man up and make a price, then don't send out a run.)

Anyway, it seems like you have some old-school cash abs guys who know the collateral, and some new jack correlation guys who are trying to trade this stuff like cdx tranches, and very little common ground. This product presents some interesting challenges from a modeling/valuation standpoint, but I think ultimately it's more like a bond than it is like a derivative.

Just throwing out some thoughts/reflections/whatever - no major point here.

Martingale · Post by **Martingale** » Mon Feb 19, 2007 2:07 am

what does "crossed" mean? I agree with the old-school cash/jack corr dispersion... I have been scratching my head and watching curiously

apine · Post by **apine** » Mon Feb 19, 2007 3:49 am

it means bank a bid 105 and bank b offered 92. and hedgie c trade with both and ka-ching!

(ok, so i dont know how this product is priced, but that's pretty much what J-Stork is talking).

Struct.Cred · Post by **Struct.Cred** » Mon Feb 19, 2007 7:13 am

It indeed looked like TABX was a free for all last week. I think it may be a bit more orderly once it reopens, since MarkIt should post the first (weekly) closes. I suspect most dealers will align their runs around those.

kr · Post by kr » Mon Feb 19, 2007 9:56 pm

I think you have too many CDX guys who want to expand their realm. I hope they spend all their time trying to model the underlying ABS bonds like a vanilla corp CDS and just jam a basecorr on top of it (and then trade at a basis to BBB corp corr). At the end of the day, there is just 15MM of real-money underlying for each component. I don't really see how this is gonna work.

Struct.Cred · Post by **Struct.Cred** » Mon Feb 19, 2007 10:30 pm

I suspect the CDX guys are still trying to bolt the base corr / implied PD models to the PAUG template on ABCDS. The market so far has been far too chaotic to identify any rhyme or reason to it (other than crossing the dealers), but from what I've seen and heard, the upper tranches of the BBB- index is where the correlation guys have been playing so far.

Cheng · Post by **Cheng** » Tue Feb 20, 2007 8:53 am

[i]but from what I've seen and heard, the upper tranches of the BBB- index is where the correlation guys have been playing so far[/i]

Sounds reasonable. I haven't seen any prices so far but I guess if you come form CDX land these tranches look like a free lunch: underlying BBB- credits and a relatively high tranche = almost no default risk and a decent spread. At least in their opinion...

Base Corr is bogus anyway and I expect things to become even worse there. Good news for the raiders among us Evil Smile .

Struct.Cred · Post by **Struct.Cred** » Tue Feb 20, 2007 9:57 pm

Given the width of the BBB- tranches (and BBBs for that matter), the implied spread on the supersenior tranches does seem tight. Makes you wonder if people don't just use the bcorr model but EL map the CDX corr curve to TABX Head against Wall

Meanwhile, MarkIt did publish the closes here

JabairuStork · Post by **JabairuStork** » Sat Feb 24, 2007 10:25 pm

confirming that yes, most peeps do just jam a corp-style basecorr skew on the tabx, and yes they do spend most of the time and effort screwing around with prepay parameters.

seems like a clear example of people failing to play to their strengths and instead playing the other guy's game. Seriously, is there anyone trading credit or credit correlation who has even 10% of the prepay knowledge that even a 2nd rate mortgage desk has? I doubt it. The area where they do have a competitive advantage, correlation, they are just pissing into the wind.

Wish I was in the long ABX short builder and mtge lender credit convergence trade this past friday . . .

Martingale · Post by **Martingale** » Sun Feb 25, 2007 12:04 am

I think there will be quite some interesting trade to be put on...by the way, stork, you need to check your email about next week(if you have not), when we can piss into the wind or whatever