Go long AAA ABX says Morgan Stanley

A new research report from Morgan Stanley, "ABX AAA opportunity: there is hope now" calculates that 100% of the remaining collateral underlying the ABX 06-1 AAA index would need to become delinquent with a 50% loss severity to "break" the index and justify the recent "staggering" price declines in this index,

The researchers say the ABX AAAs may now be attractive for going long risk - though the performance of the four different ABX vintages differes considerably. However, overall it is the confluence of technical factors - hedge fund blow-ups, margin calls and concern over monolines driving buying of protection buying using the most liquid vehicles available - that explains the recent steep price declines in ABX AAAs rather than deterioriation in the underlying fundamentals, according to the report.

The analysts note that the most recent remittance reports show that that the rate of increase in 60+day delinquencies has actually moderated a little. However, the report says that the subordinated tranches of ABX have a high likelihood of substantial principal writedowns, and that the market is correct to price them on an interest-only basis with "a bit of optionality".