The CDO secondary market is growing steadily. Reportedly both Lehman Brothers and Morgan Stanley's CDO secondary desks traded about $1.5 billion of CDO secondary paper each in 2001, of which roughly 50% consisted of triple-As, 25% double-As/single-As, with the remaining 25% made up of triple-Bs down to equity.

Two distressed arbitrage cashflow high-yield CDOs, with triple-C buckets in the high-teens to low 20s, were offered in the secondary market last week. The two triple-A blocks were said to be offered in the low to mid 90s-basis-points area over Libor, investors report. Both deals, which have a mix of high-yield bonds and loans, are on credit watch negative.

"Traders and investors are commonly analyzing CDOs based on the market value of the underlying collateral," commented one CDO investor. "This is a lot of work and putting a string of CUSIP numbers into a pricing service isn't terribly accurate since the marks are back-dated by one month and you generally never know what something is worth until you have to sell it."

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