New users in the credit default swaps of collateralized debt obligations market are increasingly buying protection on CDOs backed by asset-backed securities. At the same time, activity in CDS of CDO has risen, reflecting a swollen pipeline of mezzanine ABS CDOs.
There has been $1 billion of notional value in bids and offers for protection over the past two weeks in the CDS of CDOs. During the same period, the balance between buyers and sellers of protection has become more evenly split. Before, about 80% were selling protection, mostly dealers hedging their future pipeline of deals, noted one CDO trader.
One reason this is happening now is because market participants are getting more comfortable with the CDS of CDO template. As a result, hedge funds are now expressing their views on the market, the trader said.
The mezzanine ABS CDO pipeline, which currently stands at $17 billion, is around 84% of which is synthetic. "The pipeline is historically high despite the fact the equity arbitrage is not as good as in January when ABS spreads were wider," said Kedran Garrison, CDO researcher at JPMorgan. She noted the pipeline then was only $12-15 billion.
