Interesting innovations in fixed income – “CPDOs”
What are the risks? The big danger is that there are a large number of defaults in the investment grade bond market. It is, however, very rare for an investment grade bond to default immediately – in almost all cases, companies that default are high yield companies that have been in distress for a considerable period of time. Indeed, it would require an unprecedented incidence of investment grade defaults for investors in CPDOs to lose their original investment, which is why the ratings agencies have given CPDOs an AAA rating.
The current low yield, low default environment makes these products attractive, and institutional investors are expressing a keen interest. The complexity of these products means it will be quite a while until the regulatory authorities allow retail investors access, but encouragingly, things are definitely moving in the right direction. The new “wider powers” regulations allow retail investors to buy funds that use derivatives such as Credit Default Swaps, so it’s not an impossible leap for retail investors to have the option of investing in CPDOs in the not too distant future.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.