CDO market to hit $2 trillion by end of 2006, Celent says

According to research by Celent, the notional size of the collateralised debt obligation (CDO) market should reach $2 trillion by the end of next year. In the analysis, the New-York-based consultancy argued that dealers will have to specialise their activities due to the complex nature of the market.

Celent says that increased investor demand as spreads tighten in other asset classes, alongside greater need by banks to lay off the risk of loans as Basel 2 regulations are phased in, will continue to drive the CDO market's growth. The market's average annual growth rate during the last seven years has been around 150%, according to Celent.

The consultancy claims that few banks are prepared to be active in all parts of the CDO market, and predicts that regional commercial banks will concentrate on risk origination, while larger banks will focus on structuring and distribution.

Celent highlighted overlap risk - the risk that default by a popular name might prompt a broader market downturn - as a possible factor that could negatively affect future growth. For example, 80% of CDO reference Ford, General Motors, and General Electric, with 40 of the most popular names appearing in 50% of deals, Celent said.