There were at least seven multi-sector collateralized debt obligations in the market last week, four of which were CDOs of CDOs, driving a strong bid for mezzanine and subordinated CDO paper.

Morgan Stanley Dean Witter was showing investors a $200 million to $300 million CDO-backed deal for Triton Partners, while Lehman Brothers has the books on a deal for Coast Asset Management, also backed by CDOs, size unknown.

Massachusetts Mutual and Rabobank were both putting together CDO-backed deals, $400 million and $500 million respectively, mandates unknown.

Meanwhile, Credit Suisse First Boston is still in the market with Structured Finance Advisor's CABS II, a $254 million CDO of ABS. Bear Stearns is said to be prepping a $350 million deal for Asset Allocation & Management called Dash III, while Deutsche Bank is lead manager for a deal called Zing III, both backed by ABS. Dash I, which priced back in 1999, was the first multi-sector CDO.

As a result of the CDO for CDO bid, triple-B tranches in the secondary market were trading at 210 over the one-month Libor, in from +250 earlier in the month, First Union noted in a commentary.

First Union added that the demand for triple-A CDO paper is getting stronger due to arbitrage asset-backed commercial paper conduits and hedge funds, which can achieve attractive returns by leveraging the investment in a CDO 25-30 times.

Further, several CDO investors are saying high-yield defaults have peaked and the risks are properly priced into the market, helping a stronger bid for high-yield CBOs. Case in point, Liberty Square II, which was brought by Lehman, priced at +43 over Libor, two basis points inside of talk, a strong showing for Wellington Management.

The Liberty portfolio is expected to be aligned with a composite index of Vanguard's high-yield bond mutual funds, and Wellington's own high-yield business.

Liberty was pre-marketed in the plus-45-area on the triple-As and plus 70-72 for the double-A-minus tranche. The pricing squeeze indicates strong bid for CDO paper from seasoned asset managers, investors said.

Also, last Wednesday, the arbitrage CLO from Octagon Investment Partners tightened two basis points on the triple-A class launch levels to price at +43 over Libor via First Union.

Of note, UBS Warburg printed Northstreet CDO III, the first synthetic ABS backed CDO to be placed in the 144A market. The $2 billion deal references asset-backed debt purchased by UBS Warburg's principle finance group based in New York.

The portfolio includes CMBS, CDOs, and diversified ABS, weighted in that order. The $100 million Aa2'-rated top tranche was premarketed at +80 over the three-month Libor, finally pricing at 100 over. The other funded tranche, a $60 million Baa1'-rated tranche, was unofficially talked at +250/3ML and finished off at +375/3ML.

Meanwhile, PIMCO is said to be in the market with an investment-grade CDO called Balboa. Buysiders said the deal will be backed 90%by investment-grade corporate bonds and 10% other, likely including a significant chunk of ABS.

The European market continues to gain speed. Merrill Lynch Asset Management has a E300 million CBO backed by euro denominated high-yield bonds underway. The deal, which is called Quicksilver, is several weeks from launch, sources said.

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