According to one CDO equity investor, each time a cashflow CDO pitch book arrives in his inbox he deletes it. Not that he is opposed to the asset class. However, static pool synthetic investment grade CDOs, with no manager fees, can pay nearly a 40% yield, if using a zero default base case.

"Without giving away my secrets, one can structure five, five-year bullet, synthetic CDO equity investments so that if four out of five deals have their cashflow shut off, you would still break even on total principal investment," the investment manager said. "However, I still wouldn't touch the mezzanine class in an investment-grade CDO in this environment."

To be sure, spreads for investment grade synthetic deals have widened out substantially in the past month. For example, in the secondary market, five-year bullet synthetic CDOs issued in June are now seen as wide as 125 over three-months Libor at the double-A level, and 200 to 225 over three-month Libor at the single-A level.

"Generally on the senior notes, CDOs are bid 25 wider as soon as they come out of the gate," said Lang Gibson, head of structured credit product research at Banc of America Securities. "Add some stress, and even the triple-A tranche may be bid 150 to 200 basis point wider from new issue."

Investors believe that new issue synthetic investment-grade CDO spreads probably need to push out further from current levels. This creates incentive for investors to wait out the dealers' patience, since dealers generally do not sit on CDO inventory past year-end.

In June there were 15 tranches of synthetic CDOs downgraded, and 155 year-to-date, according to data kept by Bear Stearns.

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