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Capital Markets

Yield hunger drives structured credit

Lack of volatility and narrow spreads have driven investors to seek out yield in the structured credit market. New products built on transparent, non-proprietary credit derivative indices have fed this demand but participants worry that not all investors have a clear idea of what they are getting into.

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A NEW KIND of investment tip is circulating in the City. "If you want to make money, buy a first-to-default note on a bank" was the advice overheard in a London restaurant last month. Where once investors were sold on the easy-to-understand virtues of cheap bonds or undervalued equity, these days it seems that conspiratorial figures hunched in urgent conversation over their lunch plates are just as likely to be discussing the latest collateralized swap obligation, first-to-default basket, or credit option.

Some of the smartest players in the financial markets – and perhaps many of the not so smart – are piling into structured credit. "We've seen new buyers coming into the market," says Marc Pantic, financial engineer in the structured credit team at SG CIB in London. "Structured credit volumes have increased significantly due to continued activity from traditional users of the product – principally banks – but also because of the arrival of new users."

Standard & Poor's estimates that the European CDO market nearly tripled in size last year.

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