False dawn for first loss

CDO equity

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The collateralised debt obligation market is facing tough times. The relentless tightening of CDO spreads and the influx of money into the product in the last 16 months has diminished returns on senior and mezzanine tranches. Between May 2005 and November this year, investors saw spread levels for senior and mezzanine tranches on the five-year iTraxx index contract from Libor plus 52 basis points to Libor plus 13.75bp and from Libor plus 180bp to Libor plus 51bp respectively.

The asset class

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