According to the latest Research Quarterly released by the Securities Industry and Financial Markets Association (SIFMA), the 2007 full-year issuance total, $6.44 trillion, was virtually unchanged from the $6.47 trillion in securities issued in 2006. On the strength of a strong first half of the year, 2007 corporate and municipal bond issuance set records. In the second half of 2007, the weaker housing market, risk repricing and diminished credit market liquidity contributed to a much more volatile U.S. capital market environment. As a result, second half issuance slowed to $2.70 trillion compared to $3.74 trillion in the first half, and the fourth quarter volume was $1.36 trillion compared to $1.72 trillion in the fourth quarter of 2006.
“The capital markets started out strong last year, but the
subprime downturn, credit market correction and loss of liquidity severely
dampened activity in several key sectors in the second half,” said Michael
Decker, senior managing director and head of research and public policy at
SIFMA. “The outlook for 2008 rests on
how quickly the economy recovers from the hits it took last year,” according to
Decker.
2007 Securities Markets Review
- Corporate bond issuance reached a record volume in 2007, totaling $1.11 trillion, a 4.5 percent increase over 2006. Substantial issuer demand during the first half of the year drove volume based on strong investor risk appetite, ample liquidity and the elevated debt-financed corporate acquisition levels. Corporate volume dropped in the second half of 2007, resulting in $450.8 billion total issuance compared to first-half 2007’s $655.6 billion as credit spreads widened and financing conditions tightened.
- Issuance of municipal short and long-term securities also set a 2007 record of $486.6 billion, 13.1 percent higher than the $430.5 billion issued in 2006. Long-term issuance was $428.8 billion, 10.9 percent above 2006. Issuance growth benefited from increased refunding activity, especially in the first half of the year and continued solid credit quality, despite reduced housing activity and below-trend growth. The current bond insurance situation has had a marked effect on the municipal sector in late 2007 and into 2008.
- Fourth-quarter mortgage-related securities issuance, including agency and higher credit quality non-agency securities, dropped sharply to $384.7 billion from the $483.4 billion issued in the third quarter due to the combination of housing market deterioration and credit market turmoil. For the full year, however, MBS issuance totaled $2.04 trillion, higher than the $1.99 trillion issued in 2006. While private-label MBS issuance decreased by 15.2 percent to $655.6 billion from 2006’s $773.2 billion, agency MBS issuance became the more dominant portion of the market, reflecting the historically wide spreads between agency and non-agency MBS yields. SIFMA anticipates a continuation of this trend during 2008. Asset-backed securities (ABS) issuance declined by 31 percent to $865.2 billion in 2007 from the 2006 record of $1,253.1 billion. ABS volumes, which include lower credit quality mortgage ABS, were affected by deteriorating conditions in the subprime mortgage and home equity loan (HEL) sectors.
- Treasury issuance declined in 2007, as a result of a lower federal budget deficit in fiscal year 2007. Total net issuance of Treasury securities was $179.4 billion for calendar year 2007 compared to $152.0 billion in 2006. Net issuance of Treasury coupon securities in the fourth quarter was $41.1billion. SIFMA forecasts $125 billion of net new issuance of Treasury securities in the current quarter, with the rise attributed to the increased borrowing needs of the federal government based on a higher projected deficit. The Treasury yield curve steepened over the latter half of 2007 and into 2008 with the 2 year to 10-year spread the steepest since December 2004. Declining benchmark yields as a result of the “flight to quality” since the onset of credit market turbulence have led to the rally in Treasury prices.
- The global collateralized debt obligation (CDO) environment changed dramatically in 2007 as the effect of credit market volatility, deterioration in subprime mortgage credit quality, valuation uncertainty and a deleveraging trend hit the sector. Global CDO volume fell by 62.0 percent in the second half of 2007 compared to the first half. Full-year issuance decreased to $485.7 billion, a 12 percent decline from 2006 volume.
- While all three equity indices reached record highs during 2007, the fourth quarter saw declines in the indices which accelerated in early 2008 because of credit market conditions.
Outlook for 2008
SIFMA expects that the ongoing tight financing conditions
that lowered new issuance in the second half will continue to drive the market
outlook in 2008. The length and
severity of the mortgage market and the housing market downturns remain
critical variables in the market outlook.
Market participants’ ongoing assessment of market pricing will take into
account the degree to which “bad news” has already been reflected in pricing,
whether the market has become “oversold” and the prospects for a market
recovery. The capacity for capital
replenishment and the success of ongoing initiatives to free up interbank
lending and credit markets are additional factors that influence the 2008
market outlook. The Federal Reserve has
already been responsive through the introduction of the Term Auction Facility
in December and by cutting the target Fed funds rate by 125 basis points to
3.00 percent.
The full Research Quarterly is available at the following link:
