A while back I wrote about the rather sudden increase in the cost of credit insurance for on low-rated subprime MBS tranches. The net effect was that the cost of credit protection for these mortgage-backed securities had increased by 25% in just a week.
The below chart shows the same index of low-ratest subprime CDS tranches we looked at earlier:
Credit protection on the BBB- tranches has now increased fourfold in just a few months, to about 1,000 basis points.
Now, it seems that this deterioration has rather suddently started to eat away at the higher-rated tranches:
Please note that the scale is very different on the two graphs… the BBB- index is down to 72.5 while the AAA index is still at 99.7. However, even the move seen in the second graph is pretty abrupt for what’s supposed to be a AAA rated security.
This is all part and parcel of the general meltdown we are seeing in the world of subprime. Other symptoms include lenders tightening their standards, seeing their stocks drop 40% in a day, or outright shutting down. The payback for years of reckless lending has been fast and furious. And it’s not over yet.