The decline in the high yield market this year has in turn slowed the issuance of collateralized debt obligation funds, and even though there are several new CBOs in the pipeline, sources last week cautioned that those funds probably won't make a big impact by themselves.

In the first quarter, there were $17 billion in new junk bonds issued, down from $27.3 billion in the year-ago period, according to Thomson Financial Securities Data. Of that, about $3 billion of new CBO assets came into the market in the first quarter, compared to nearly $50 billion in all of 1999, according to a sell-side analyst.

And until new issuance in the overall high yield market picks up, the CBOs likely will languish too.

One high yield mutual fund manager said there are about four new CBOs in the market now, each of which are in the $300 million to $400 million range.

One of the challenges that CBO funds face is their limit on the amount of telecommunications paper they can buy. To adhere to rating agency requirements, they typically can only hold 11% to 12% of their assets in the sector. Most of the major high yield indices weigh telecom more than that, and most mutual funds weigh it higher yet. And since telecom has accounted for the majority of new issuance, CBOs must look elsewhere for their backing.

That, or course, has created some liquidity in those smaller issues, buy-siders said, but it simply makes it tough for CBO managers in the current high yield market.

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