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Derivatives

Pros Predict CDO AAA Tranches Will Widen

Credit spreads for the senior tranches of collateralized debt obligations are expected to widen.

Credit spreads for the senior tranches of collateralized debt obligations are expected to widen. Ross Heller, v.p. and head of global trading at JPMorgan, said the exit of financial guarantors, who are traditional players in CDOs, may result in widening of around five basis points at the top of the capital structure. Anthony Thompson, managing director and head of ABS and global CDO research at Deutsche Bank, agreed noting that spreads are already close to their historical highs.

Mezzanine paper, by contrast, is considered better value and continued demand for the tranches will likely hold spreads steady, Heller said. Smaller-sized insurers, who had exited the market, are also starting to creep back looking for yield and this will enhance demand for these tranches, he noted.

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