LAGUNA NIGUEL, CALIF. - The towering wall of liquidity that continues to prop up the U.S. CDO market could begin to crumble in 2006, as credit concerns over the health of the residential housing and corporate credit markets begin to sour investor appetite, said participants at this year's Opal Financial Group CDO Summit held here last week.

"Liquidity is going to drop. It's not a question of if,' it is a question of when,'" said Evan Kestenberg, a CDO trader at United Capital Markets. And while some pointed to signs of widening spreads in triple-B minus rated home equity ABS tranches as evidence that investors are beginning to put less value in those bonds, others say it was evidence, rather, of the influence that hedge funds now wield over the sector. Indeed, some are concerned that liquidity could evaporate, given that many believe the U.S. housing boom is at least partly driven by this group of flighty investors.

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