June 26 (Bloomberg) -- Planned sales of collateralized debt obligations backed mainly by subprime mortgages are drying up and may shut down amid concerns about the integrity of the market following the near collapse of hedge funds run by Bear Stearns Cos., JPMorgan Chase & Co. said.

The amount of U.S. high-grade, structured finance CDOs that are being offered to investors has plunged to $3 billion, from $20 billion a month ago, JPMorgan said in a report dated yesterday. CDOs are pools of asset-backed securities, bonds or corporate loans divided into securities with different credit ratings and maturities to cater to investors' preferences.

Bear Stearns, the biggest broker to hedge funds, is trying to keep two funds afloat after bad bets on securities backed by home loans led creditors including Merrill Lynch & Co. to seize and sell off some of their assets. That response by creditors, which included a demand for more collateral, raised questions about whether the mortgages and other assets contained in recently issued CDOs have been accurately valued by the market.

``We expect events surrounding warehousing liquidations last week to further slow, if not halt entirely, the new issue market,'' JPMorgan analysts led by Chris Flanagan in New York said in the report.

The average yield premium of high-grade structured finance CDOs with BBB ratings widened 1.5 percentage points last week to 7 percent over the London interbank offered rate, the biggest spread this year, JPMorgan said. Libor is a borrowing benchmark.

The damage to the $1 trillion CDO market could freeze what has been a large source of liquidity for the credit markets, Tim Backshall, chief strategist at Credit Derivatives Research LLC, said yesterday.

Not Dead Yet

High-grade structured finance CDOs include asset-backed securities of home mortgages that have high credit ratings such as AAA by Fitch Ratings or Standard & Poor's. Through June 22, issuance this year has risen 23 percent to $66.6 billion from the same period in 2006. That's second only to issuance of CDOs that contain corporate loans, of which $114 billion was sold.

``There won't be many deals for a while, and then it will come back,'' Nomura Securities analyst Mark Adelson said in an interview. ``I don't think anybody is going to declare the sector dead.''

Merrill Lynch last week seized and sold $800 million in securities from the Bear Stearns High-Grade Structured Credit Fund to cover loans outstanding. Bear Stearns eventually stepped in with at least $1.6 billion to bail out that fund.

New York-based Merrill said June 25 that a second fund, the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund, is also teetering under the weight of losses on securities backed by home loans and may need to be saved as well. That fund owes about $7 billion to its financiers, according to Merrill analyst Guy Moszkowski.

Subprime mortgages are loans made to borrowers with poor or limited credit histories, or high debt burdens.

To contact the reporter on this story: Darrell Hassler in Chicago at dhassler@bloomberg.net.

Last Updated: June 26, 2007 13:12 EDT