In late 2006, the head of distressed debt at a large multi-strat fund called my former boss and said: "We have been buying protection of hundreds of millions of subprime and Alt-A. Get involved." So in early 2007, I started looking through prospectuses and shelves and we bought protection on a number of deals as well as both vintages of the BBB- 2006 ABX. I must have hit CLP GO ten thousand times in 2007 looking for the worst of the worst. For instance, here is the CLP screen for CWL 2006-8 (using M6 here)
"You are fighting headwinds in the high yield market...where you have hundreds and hundreds of players in the market scrambling searching for yield...or buying high yield bonds where there have been massive inflows into the market. The nice thing structurally about this market is there haven't been natural inflows into the market, there have been natural sellers. You have multi-trillions of dollar of paper with nothing but sellers. Meanwhile, the supply side of the market is naturally speaking because of defaults and prepayments, so there is less and less and less of paper available. The market actually shrinks 1.5% every month..."
"Given the weakening of the economy since the sales started, we think the next logical step is to halt the sales altogether or sell the entire portfolio at once, and allow the market to reset to lower levels."
"On top of your RMBS in your email I wanted to add a few comments in regards to the non - agency CMO market. Which in my opinion is one of the only asset classes that still has absolute upside along with attractive yields. We have seen CMO prices off 5%-10% since Feb.. due to a flattening yield curve and higher supply. Loss adjusted yields are still very attractive. Technically: Demand for NA CMOs picked up substantially in Jan/Feb of this year and appears to be here to stay. The new depth to the market has brought several of the early liquidity providers (e.g. central banks) to market. The most notable seller is the Fed (Blackrock managed) who is selling the Maiden Lane II portfolio. This additional supply has kept the market soft and should create some good buying opportunities this summer. Fundamentally: Recent housing news did not come as much of a surprise to anybody and it did not help. That said the feeling from the research I have seen is that there is more upside then downside. Based on the current market, I think remaining patient and accumulating dry power is smart. That said legging in over the summer could be the best avenue to take advantage of based on the recent sell off. The sense is another 1 or 2 points lower is where the buyers lie"