Markit ABX triple-A index prices have climbed modestly over the last six months, due to improving investor sentiment on subprime RMBS. Moody's expects recovery values to improve gradually over the next few years, driven by further strengthening in the housing market and better macroeconomic conditions.

Last cashflow (LCF) triple-A prices have since July 2013 increased by four points for ABX 2006-2, 10 points for ABX 2007-1 and seven points for ABX 2007-2. Additionally, ABX 2006-1's double-A prices now nearly match the penultimate triple-A prices because 16 of the 20 PENAAA bonds have paid down in full and brought double-A bonds closer to receiving payments.

Stronger performance of the underlying subprime collateral has led to improving market sentiment on the sector, Moody's notes. "Loan default rates have slowed, reflecting declining loan-to-values among still-current borrowers, as a result of housing market improvements and an improving broader economy. Serious delinquencies have declined across all indices as servicers continue to work through the backlog of delinquent borrowers. Meanwhile, there has been a modest increase in realised losses."

Moody's expected principal recoveries for the cash bonds backing ABX triple-A indices have generally stabilised since July 2013, consistent with the improving market sentiment about the sector and, in turn, higher ABX prices. The differential in recoveries between LCF triple-A and PENAAA is narrowing, due to the impending shift in principal priority after the mezzanine certificates are written down, subsequent to which the last cashflow bonds will start receiving principal pro-rata with PENAAA bonds.