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“As anticipated, much weaker market conditions are affecting issuance volumes, and we expect economic growth to continue at a below-trend rate,” said Michael Decker, senior managing director for research and public policy at SIFMA. “Global demand and employment and income gains are compensating for some of the difficulties in the housing sector, but fragile credit market conditions will persist, affecting issuance and demand into 2008.”
Long-term municipal issuance year-to-date totaled $324.4 billion, as compared to $265.8 billion in the same period of 2006. A substantial issuance calendar, lower rates and solid credit quality of state and local governments helped to buoy issuance. Issuers were motivated to refund outstanding debt by historically low yields, with refunding volume contributing 38.3 percent of the overall primary market activity in the first nine months, compared to 31.7 percent in the same period of 2006. Following a strong third quarter, issuance was on track to top the $408.2 billion record set in 2005.
With the credit markets in turmoil for much of the third quarter, investors sought the safety and stability of the Treasury markets, which contributed to increased trading activity in the quarter. Total net issuance of U.S. Treasury securities, including bills and coupons, was $92.3 billion in the first three calendar quarters of 2007, compared to a net issuance of $110.9 billion in the same period of 2006. The White House Office of Management and Budget announced a budget deficit of $163 billion for the fiscal year that ended September 30, the lowest full-year deficit in five years, helped by sustained economic growth and resultant higher tax receipts. SIFMA’s recent Treasury market forecast projects a somewhat higher budget deficit of $200 billion in fiscal year 2008 in anticipation of below-trend growth over the next year.
Corporate bond issuance rose to $881.1 billion in the first nine months of the year, a 13.5 increase over the same period in 2006, and remains on a record pace despite a slow third quarter. However, heightened investor risk sensitivity, credit risk repricing and reduced liquidity dramatically altered the market environment in the third quarter. Underlying corporate financials have remained fundamentally solid and credit quality is stable at present, although the consensus view is that the default rate will rise over the coming year. For instance, S&P projects an increase from the current rate of 1.13 percent to 3.4 percent, which is still lower than the historical average. Non-convertible investment-grade issuance increased 14.5 percent in the first three quarters of the year, to $776.6 billion, higher that the $678 billion issued during the same period a year ago. Despite a slow third quarter, high-yield issuance increased 17.4 percent in the first three quarters of the year, to $104.5 billion. Reduced liquidity and credit market repricing led to a sharp third quarter decline in high-yield issuance to $9.0 billion from $23.5 billion in the third quarter of 2006.
The equity market rallied late in the quarter, supported by signs of improved credit market conditions and renewed credit availability. The equity market has since given back some of those gains as credit market conditions weakened once again. Two key considerations for the market outlook are credit market trends and whether corporate profit momentum can be maintained in an economy growing at a below-trend rate and under the cloud of housing weakness.
The current edition of the research quarterly also provides
a review of the state of the leveraged loan market. The full report is available on SIFMA’s website at the following
link: http://www.sifma.org/research/pdf/Research-Quarterly-1107.pdf.
