CDO spreads are tight and it appears major U.S. insurance companies have sold all the distressed collateral they care to let go of at this point, according to the industry's secondary traders last week. Yet, what sounds like a dour situation is anything but for a market that feeds on innovation. Traders believe more sophisticated analysis will lead to a more liquid secondary market for various types of CDO collateral, with some traders nodding towards ABS CDOs.

"Our struggle is to find the sellers. Selling by U.S. insurers - I think that's over," said Keith Grimaldi, a director at UBS, speaking at last week's CDO Conference hosted by The Bond Market Association.

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