Monday, September 8, 2008

CDX index has priced in high recovery rate of GSEs

Dealers today were quoting the CDX index contracts both with and without Fannie and Freddie. Contracts with the companies dropped 7 basis points to 138 basis points as of 3:45 p.m. in NewYork, according to broker Phoenix Partners Group. Contractswithout the companies were trading 1.5 basis points to 2 basispoints tighter, according to Credit Derivatives Research LLC. That would imply the market has priced in a recovery rate, as a percentage of total value, ``in the mid-to-high 90s,'' said Tim Backshall, chief strategist at Credit Derivatives Research inWalnut Creek, California, meaning investors who bought protection would get five cents on the dollar or less to settle. Five-year contracts on the senior debt of Fannie and Freddie had been trading at about 38 basis points on Sept. 5, accordingto CMA Datavision. That's down from 81 basis points on July 10. Contracts on Fannie subordinated debt fell from a record high of 364 basis points on Aug. 20 and closed on Sept. 5 at 233 basis points, CMA prices show. The cost is equivalent to $233,000annually to protect $10 million in notes from default.

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