You want US CLO triple-A exposure and you have a rough idea of the bonds that fit your profile. Or, you’ve suddenly turned bearish and would like to hedge that same portfolio. The age-old question is — how can you possibly trade generic US CLO triple-A risk?
The answer could well be TBA. That’s not us hedging ourselves — there are talks taking place over how to develop a to-be-announced market to create two-way flows in US CLO triple-As.
These discussions — led by Pimco and featuring major buysiders and dealers — are at a very early stage. One source notes that the discussions are not yet at the stage of a firm proposal. A 10-page preliminary document seen by 9fin outlines the thinking behind the concept.
“CLO secondary trading is conducted cusip by cusip. Every senior tranche carries its own manager, vintage, reinvestment profile, coupon, and underlying collateral pool, so there is no fungible instrument for trading or hedging generic triple-A risk on a forward basis,” the paper begins.
It goes on to draw a parallel with the agency MBS market, noting it faced a similar “heterogeneity problem”, before solving it with TBA. “The result is the deepest forward...
