While it is true that CDO volume is dramatically down for the year - 2002 year-to-date global cashflow CDO issuance is 43% behind issuance last year, according to Banc of America Securities - blame does not rest squarely on the shoulders of heavy rating volatility and proposed FASB accounting changes, market sources say; the fact that the CDO arbitrage in high yield (HY) and investment-grade (IG) corporates has been tightening significantly has not been helping matters either, they note.

Last week's increasing optimism surrounding a turning economy and second-quarter earnings prospects led to continued tightening in both HY and IG corporate-bond spreads. Since Feb. 22, for example, single-B HY bond spreads have tightened a full 110 basis points, according to Banc of America Securities (BAS) Large Cap Index.

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