CDO Hedging Expands Curve Trading Liquidity

A newly-liquid point on the yield curve for relative value curve trading has been created by a pickup in demand for seven-year collateralized debt obligations.

  • 29 Jul 2005
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A newly-liquid point on the yield curve for relative value curve trading has been created by a pickup in demand for seven-year collateralized debt obligations. Derivative houses issuing the seven-year mezzanine deals are hedging the trades by selling tranche protection and the hedging has created a viable seven-year trading point on the curve, traders reported.

"The CDO supply has come in seven years and driven the tranche market," said a trading official at a European house. "There is lots more value in seven years than 10 years," agreed a structuring official in London.

Traders reported a boom in five- to seven-year and seven- to 10-year curve trades on CDX and iTraxx last month, sparked by the increase in liquidity in seven-year mezzanine deals.Olivier Renault, v.p. in the CDO research group at Citigroup in London, said the seven-year deals offer more attractive spreads and greater yield. "People have been buying this tranche like crazy because of the price you pick up for only two years extra maturity," he said.

Renault noted the cost of seven-year protection on the 3%-6% bracket of the mezzanine tranche is around 140 basis points, compared to 75 bps for five-years which traditionally is the most traded maturity. He said five-year trades continue to be the most liquid in the market, but volumes in seven-year maturities have already passed 10-years in the short time they have been traded.

  • 29 Jul 2005

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
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1 Citi 58,137.72 186 8.23%
2 JPMorgan 57,032.77 202 8.08%
3 Barclays 49,551.65 159 7.02%
4 Bank of America Merrill Lynch 42,095.04 147 5.96%
5 Deutsche Bank 38,217.89 137 5.41%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
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1 Bank of America Merrill Lynch 6,045.16 4 18.58%
2 BNP Paribas 1,742.18 7 5.36%
3 Credit Agricole CIB 1,539.94 8 4.73%
4 MUFG 1,257.24 4 3.87%
5 SG Corporate & Investment Banking 1,165.08 6 3.58%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
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1 UBS 998.25 3 13.49%
2 Citi 693.55 2 9.37%
3 Morgan Stanley 572.72 3 7.74%
4 Bank of America Merrill Lynch 509.34 3 6.88%
5 Jefferies LLC 409.89 4 5.54%