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According to the latest Research Quarterly released by the Securities Industry and Financial Markets Association (SIFMA), securities issuance in the first quarter of 2008 reached $1.43 trillion, an increase from the $1.36 trillion issued in the fourth quarter of 2007 but substantially lower than the $1.81 trillion issued in the first quarter of 2007. The year-over-year issuance decline was the result of the uncertain capital market conditions over the past year. The sharpest declines occurred in the most credit risk sensitive sectors, including nonagency or private-label mortgage-related securities and high-yield bonds. Investment-grade corporate bonds experienced a more modest volume decline, and agency debt and mortgage-backed pass-through securities volumes rose on a year-over-year basis.
“Federal Reserve actions since the first of the year have had the effect of enhancing market liquidity. Over the past month, we have seen some improvement in market conditions as demonstrated by reduced volatility and a financial asset price rebound at the end of the quarter,” stated Kyle Brandon, managing director, research.
“Since the end of the first quarter, there indeed has been evidence of increased market stability supported by progress in bank loss recognition and capital replenishment. This is contributing to signs of renewed investor confidence, setting the stage for increased capital market issuance in the second quarter,” said Steve Davidson, managing director, capital markets research.
First Quarter 2008 Securities Markets Review
- Short and long-term municipal issuance totaled $89.2 billion during the first quarter, below the record $114.0 billion issued in the same period last year and the $125.7 billion issued during fourth quarter 2007. The first quarter declines were related to credit market stress that extended to the tax-exempt market and dislocations in the auction-rate securities (ARS) market. In March, issuers returned to the market, and that month’s volume was the third highest on record.
- Issuance in the agency debt market surged as the “private-label” conforming loan market for MBS stalled. Issuance of long-term agency debt totaled $445.5 billion, 67.9 percent higher than the $265.4 billion issued in the fourth quarter. Mortgage-related securities issuance was $377.6 billion in the fourth quarter, down from the $396.6 billion issued during the previous quarter. Agency mortgage-related issuance accounted for over 95 percent of the first quarter volume.
- Asset-backed securities (ABS) issuance declined by 39.8 percent to $57.5 billion from fourth quarter’s historically low volume of $94.7 billion. The reduced volume is largely attributed to conditions in the subprime and home equity loan (HEL) sectors. This trend started during the second half of 2007 and continued into first quarter of 2008. Credit card ABS has become the largest issuing ABS sector at $28.1 billion in the first quarter, an increase of 14.4 percent from the fourth quarter of 2007.
- Total corporate bond issuance was $205 billion in the first quarter, an approximately 15 percent decline from the fourth quarter of the record-setting 2007, with investment grade issuance accounting for over 90 percent of the first quarter volume.
- Total net issuance of U.S. Treasury securities was $190.9 billion in the first quarter of 2008, as a rising projected budget deficit projection increased the Federal government’s funding requirements. Gross coupon issuance rose by 8.1 percent during the first quarter. Gross issuance is affected by the expected refunding of maturing and callable debt as well as Treasury’s new cash needs.
Outlook
The credit market uncertainty continues to affect the outlook for all asset classes, and the credit market stresses have had global implications. Although the prospect of an economic recovery should still be considered tenuous, the cumulative impact of the increased liquidity through a series of Federal Reserve and other central bank actions and the economic stimulus package appears to be having a moderating effect on the housing and credit crunch pressures. The net effect suggests an increased probability of a pickup in capital markets activity over the balance of the year.
