Most noticeable improvement in CDOs is tightening of the “basis” between primary and secondary spreads in triple-As. At the start of 2003, the pick-up out of a new issue triple-A loan deal into a secondary offering on a clean triple-A loan deal was about 25 bp. Increasing trading volumes, generally better liquidity and improved information access caused a tightening of this basis to 5 bp. But double-A and single-A CDOs lag. There’s still considerable pick-up out of new issue into secondary. The non-PIK securities or original double-As and single-As backed by more conservatively structured newer loan deals with lower PIK risk offer the best value.

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