Bloomberg reports that CDO trading has ground to a virtual halt, which isn’t surprising given the number of pending downgrades and the propensity for CDOs to be downgraded by multiple notchhes.
Buying and selling of collateralized debt obligations based on mortgage bonds, high-yield loans or preferred shares has ground to a near-halt, traders said at the securitization industry’s largest conference.
“We’re definitely in a period of very low liquidity at the moment, which has actually been dropping precipitously in the last few weeks,” Ross Heller, an executive director at JPMorgan Securities Inc., said yesterday during a panel discussion at the American Securitization Forum’s annual conference in Las Vegas. “It’s a challenging time.”
The slowdown of the more than $2 trillion CDO market follows record downgrades in mortgage-linked securities last year. Some AAA rated debt lost all its value. CDOs, which have fueled unprecedented bank writedowns since mid-2007, repackage assets into new securities with varying risks.
Lighter trading volumes for asset-backed bonds and larger- than-typical differences between the prices at which they can be bought and sold have made valuing holdings difficult and dissuaded investors from purchasing the debt, said Sanjeev Handa, head of global public markets at TIAA-CREF….
Investors with experience with residential-mortgage assets have been buyers, paying in the “mid-teens to low 30” cents on the dollar for the senior-most, or super-senior, classes of CDOs comprised of low-rated asset-backed bonds, he [Brian Carosielli, Merrill managing director] said…
“I’ve traded one bond that’s worthless eight times this year,” [Richard] Rizzo [a director at Deutshce Bank] said. “So it’s like, `How many times can I trade the same bond that’s worthless for five cents?’ It is kind of funny.”