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With profit taking trades underway in current trading activity, it appears the secondary CDO market has developed into more than a place to shop around a bid list. And in the words of many CDO researchers, 2004 will go down as the year this market maturity but the quest for reliable spread information is just one of the many challenges the secondary market faces as it enters the New Year.
"2004 showed that trading activity in the secondary market was not a one-year phenomenon based on the liquidation of the Abbey National portfolio," said Adam Siegel, managing director, Bear Stearns. "Last year at this time, we were sitting with investors discussing the liquidation of the Abbey National portfolio and people wondered, was this it?'"
The majority of trading in 2003 was focused on first priority senior cash flows, according to Siegel. "In 2004, only 55% of our trading activity was in the triple-A space. The remainder ranged from double-As to equity. This is quite impressive," he said.
While the year showed dramatic growth in secondary trading, market participants believe there is still a long way to go before secondary CDO trading is considered matured.
"In a market that's totally matured and efficient, everyone's going to be doing the work in a very similar fashion, and often coming to very similar conclusions," said Steven D. Finnk, at United Capital Markets. "I think this was a year where the secondary CDO market has matured a great deal...but I wouldn't say it is totally mature."
But wrapping up the year at fantastically tight spreads alongside a deluge of new investors puts the secondary CDO market on more cautionary footing for 2005. Too much competition in sectors not easily understood by new investors could prove taxing.
For example, CDO bids in the secondary market still vary widely from one another and it is more than not common to have outlier bids.
"Other than discussion between market players, it's hard to get any kind of transparency. You can't rely on what you read in most dealer research because it's typically not exactly true of...