Authored by Richard Ryan via BondVigilantes.com,
It is 20 years ago this month that I sat in a pitch and listened to an investment bank describe their latest stroke of genius.
In 2006, the Constant Proportion Debt Obligation (CPDO) was hailed as a financial innovation that appeared to offer something for nothing: a AAA-rated security paying a meaningful premium over cash.
It was a structure that increased leverage as credit markets weakened. Investors embraced it because the future seemed visible.
Credit spreads had been stable for years, liquidity was abundant, and sophisticated models suggested that extreme market moves were so unlikely as to be almost impossible.
Sound familiar?
Today’s market shares many of the same ingredients.
Liquidity remains plentiful, credit spreads are tight, expected returns are compressed, leverage is rising, and a new generation of financial innovation is attracting capital. As investors search for return whilst yields remain relatively compelling, the temptation is the same as it was twenty years ago: to assume that recent experience provides a reliable guide to the future.
Source: Bloomberg, ICE BoA Indices, 31 July 2026. Investment Grade: Yield components – 5 year treasuries and credit spread (%)
That same mindset sat at the heart of the CPDO story. The problem was not that investo
