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Issuance of new securities in the U.S. capital markets rose 13.0 percent in the first quarter, to $1.8 trillion, with merger and acquisition and leveraged buyout financing driving corporate bond issuance to a record $308.0 billion, up 23.6 percent from the same period last year. In addition, as a result of increased bond refunding activity, municipal issuance rose 50.8 percent from year-ago levels to $112.8 billion, also setting a record in the first quarter. Total equity underwriting reached $61.4 billion on 202 deals in the quarter, 42.6 percent higher than the first quarter of 2006. Details on these and other financial market trends are available in the Securities Industry and Financial Markets Association’s (SIFMA) Research Quarterly, in the current issue of SIFMA Research Reports.
“The main drivers of higher issuance in the first quarter were M&As and LBOs in the corporate bond sector and low interest rates and a flat yield curve, which spurred new sales of municipal bonds and mortgage-backed securities,” said Michael Decker, senior managing director for research and public policy at SIFMA. “Looking forward, we see continued favorable market conditions. Weakness in the housing sector appears to be contained. The interest rate environment is stable, the economy continues to grow, and corporate profit growth is still on track. In addition, a healthy stock market and positive corporate credit trends will support continued growth in securities issuance.”
Net new corporate bond sales rose as gross issuance exceeded redemptions by a wide margin in the first quarter, with refinancing at about a third of high yield issuance, the lowest level in 25 years. By contrast, high-yield financing for mergers and acquisitions and leveraged buyouts are on pace to account for the largest share of total high-yield issuance in 18 years. Ample market liquidity and sustained profit growth will continue to provide the foundation for corporate financial strength and supportive credit conditions, the SIFMA report states. SIFMA anticipates corporate bond issuance to end the year at a level comparable to 2006’s record of $1 trillion.
Record municipal bond issuance in the quarter was driven by a higher refunding volume, which rebounded from late-2006 levels and accounted for nearly half of the total long-term issuance. Local and state government financing of general government operations, education, transportation and infrastructure projects will continue to lead municipal issuers to the capital markets. In addition, in some regions the softer housing market may lead to increased issuer demand for municipal bond mortgage financing programs to enhance housing affordability.
Mortgage-related securities issuance recovered in the first quarter to total $552.1 billion, the highest level since the second quarter of 2005 suggesting the sector, particularly securities backed by conforming mortgage loans, is beginning to regain strength. At this point, the subprime sector weakness appears to be fairly well contained. Asset-backed securities issuance reached $297.3 billion in the quarter, an increase of 3.3 percent from last year’s first quarter, and global collateralized debt obligation, or CDO, issue volume rose 46.8 percent to $158.4 billion.
Treasury securities issuance declined 20.4 percent in the quarter from year-ago levels to $125.7 billion, the result of reduced Treasury funding requirements as tax revenue growth lowered the federal budget deficit. SIFMA’s quarterly survey of government bond researchers and strategists forecasts the fiscal year 2007 deficit to decline to $191 billion this fiscal year. Federal agencies’ issuance in the quarter rose to $262.7 billion, up from the $187.9 billion issued in the first quarter last year.
In addition, total outstanding money market volume continued to rise to $4.11 trillion at the end of the quarter. There was a strong net inflow of new money into both fixed-income and equity mutual funds in the quarter.
The full Research Quarterly is available at http://archives1.sifma.org/assets/files/Research_Quarterly_0507.pdf
