Collateralized debt obligation shops are pitching trades in which investors snap up cheap volatility with the expectation that this will rise in the new year. In the trades investors buy equity tranches of CDOs and sell protection on the single names, which isolates the correlation element.
"Correlation is cheap because of the way the dealer community is positioned," said a CDO strategist in London, referring to the fact that CDO houses have sold a lot of
single-tranche deals this year and this has left them with correlation risk.
A CDO analyst at a major house said, "The price will revert to a more reasonable level early next year." He added that now, or closer to year end, is the optimum time to enter this type
of trade.
