Granted spread tightening has been a factor across numerous asset-backed markets but none have responded with the panache that the CDO market has. Three innovations have grown in popularity this year, including a brassy new structure that harnesses collateral in the high yield bond market.

In an effort to find relief from tightening credit spreads, the CDO market responded with CDOs of CDOs but didn't stop there, says Frank Iacono, senior vice president at Lehman Brothers. Synthetic high yield bond CDO structures began to hit investors' desks with increasing frequency this year, and Lehman melded together a synthetic CDO structure with an interest rate feature and a step-up mechanism to reduce credit exposure.

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