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Remember CDOs? Fun as hell to trade? Great way to make a deeply underwater mortgage in suburban Phoenix held by some unemployed 20-something look like an investment-grade opportunity? Maybe weren’t quite as safe as they looked or those bankers told you? Kinda sorta almost blew up the entire global economy a decade ago? Well, they’re even more back than they were before. But don’t worry: The hedge funds fixed them.

Issuers say today’s CDOs bear little resemblance to the ones that helped nearly bring down the global financial system. For starters, they argue that corporate debt is far less risky than the subprime mortgages and credit derivatives that ended up in the securities a decade ago. CDO issuers are also more restricted in how much borrowed money they can use to juice returns, both compared to previous years and what’s permissible in a CLO….

The returns can be too good to pass up. The AAA rated slice of a CDO Anchorage sold in February pays 4.6 percent, a level on par with the average double-B rated note. And there are few corporate alternatives for investors seeking the highest-quality fixed-rate debt. Only about 10 percent of U.S. investment-grade company bonds carry AAA or AA ratings, according to Bloomberg Barclays index data.

Oh, good, another we’ve-learned-nothing product in this blessed year of our Lord 2019. In this case, we’ve failed to learn that credit ratings are essentially meaningless, especially when applied to complex derivatives that are designed to make shitty credits look better than a T-bill. And some are poking a few holes in the “we figured out what went wrong and fixed it so there are definitely going to be no unintended consequences here” argument.

The hybrid CDOs that these firms are issuing can include corporate bonds as collateral, which by their nature get hit harder than loans during times of market turmoil....

“We’re not advocating adding them, generally speaking, in our general accounts,” said David Goodson, head of securitized products at Voya Investment Management, which oversees $205 billion. “We’ve seen some things that we think are pushing the envelope.”

When have I heard that before?

Hedge Funds Resurrect CDO Trade. This Time They Say It Will Work. [Bloomberg]


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