They are indices few have ever heard of outside the more arcane corners of the credit world. But they, nevertheless, are starting to flash warning signs, suggesting concerns about the mortgage market are spreading from subprime to better quality home loans.
Linked to the performance of securities backed by high-quality US mortgages, Markit’s PrimeX family of indices allows investors to go long or short in their exposure to the loans. There are four indices representing different subsets of prime loans. The more demand for “prime” credit, the higher the indices go.
You could think of PrimeX as the steadier sibling of Markit’s ABX family, which is tied to subprime mortgages and rose to some infamy during the credit crunch years.
Big banks and other subprime investors watched in horror as the ABX began dipping below par – or 100 – in the early stages of the crunch, prefacing the ensuing financial crisis. In contrast, PrimeX has largely managed to keep its head above the magical 100 “par” level since its creation in the spring of 2010. But that is rapidly changing.
Many of the indices have recently breached 100, or are veering dangerously close, having sharply plunged in the first week of October.
That begs the question of what is causing the decline. Credit rating agency Fitch completed a review of the prime mortgage market last week, laying out a laundry list of problems, including more borrowers falling behind in their payments. At the same time, investor sentiment has been volatile, with credit markets often outpacing their equity counterparts in terms of bearishness. But whatever way you look at it, the PrimeX pullback is a cause for concern. That market stress now seems to be reaching the “safer” corners of US credit markets should be worrying enough. That, three years on from subprime, the rot could also be rising to reach even higher-quality American mortgages, is downright distressing.
James Mackintosh is away
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