Senior CDOs Tranches Are Nearly Riskless, Researcher Claims

Earlier this year Citi surprised us by bringing up synthetic tranches as a way for investors to reach even further for yields, but even that was a hesitant ‘what options do you have’ sort of recommendation. In a paper that shows just how easily complacency can set in, Andreas Bloechlinger of the University of Zurich argues that senior tranches are practically as good as Treasuries.

“Senior structured finance obligations suffer losses only after the principal of subordinate tranches have been exhausted,” writes Andreas Bloechlinger . “The most senior tranches offer better protection against bad states of the economy relative to equally rated single-name corporate bonds and are thus close substitutes for the risk-less asset.”