Wednesday, May 20, 2009
The folks at Markit have some nifty but relatively arcane indices that track the performance of various asset-backed and mortgage-backed securities. The first chart here shows the price of a representative sampling of home equity-backed securities initially rated AAA, while the second chart shows a sampling of commercial mortgage-backed securities rated AAA. Note how the prices of these securities—issued typically at a price of 100—had absolutely cratered around the same time that the stock market hit its lows in March. In just the past month or so these securities have experienced a significant rally, presumably because the market has sharply revised downwards its expectations of defaults. This is highly significant, and I can't imagine how these price reversals could be attributed to anything other than a) the return of confidence, and b) improving prospects for economic growth and incomes. It's particularly reassuring that, despite all the talk about a developing bust in the commerical real estate market, securities that are directly tied to the health of that same market have experienced significant price gains across the board.
Bears will note that even with the recent price gains, these securities still reflect the expectation that default rates will be much higher than normal in both markets; that things now look very bad whereas before they looked positively dreadful. Optimists will counter that there has been significant improvement on the margin, that the likelihood of the economy falling down a black hole has declined dramatically, and that confidence is returning.
Posted by Scott Grannis at 2:53 PM