Subordinated asset-backed securities have been shunned by investors since the financial crisis of fall 1998; fears relating to Y2K only made the situation worse. Resulting low liquidity and concerns over credit kept subordinate spreads at historically wide levels, despite a return in the on-the-run triple-A sector to sane levels, at least, if not normalcy.

However, with the bad memories of fall 1998 fading at last, and with the passing of Y2K, the subordinate market has started to come back to life. Limited new supply, light dealer inventories, and cash that was held off the market last year have combined to tighten HEL subordinates by 25 to 30 basis points in just the first few weeks of the new year. We believe that this trend will continue into 2000, and at a pace that may surprise many investors.

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