Tuesday, 7 October 2008

Fannie & Freddie sub recovery bigger than senior

From Reuters, initial indications for today's auction:

FannieFreddie
Senior92.4%93.75%
Sub92.65%93.8%


Remember, kids, while senior unsecured recovery can't be lower than sub in the actual bankruptcy hearings, it surely can in a CDS auction.

Update. Final results in:

FannieFreddie
Senior91.51%94%
Sub99.9%98%


Alea suggests that the recovery mismatch is due to a cheapest to deliver effect as the zeros are deliverable into the senior swaps (list of deliverables here). Personally I think it is partly because there is a lot more liquidity on the sub than the senior. In particular naked shorts played with the sub (partly to hedge nationalisation risk). A lot of those are short covering now, whereas the senior was typically a credit risk management trade rather than speculation.

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