.jpg)
The Securities Industry and Financial Markets Association (SIFMA) today issued its 2008 U.S. Market Outlook, projecting a median 15 percent decline in fixed income issuance this year, to $3.4 trillion from the estimated $4.0 trillion issued in 2007. Issuance is expected to decline significantly in the sectors most affected by the subprime mortgage deterioration, while both corporate and municipal issuance are projected to remain high relative to historic levels. The forecast, which is based on a survey of SIFMA member firms, also calls for slower but positive GDP growth in the first half of the year and a pick up in the second half of 2008 as the economy works through the housing sector contraction and credit market turbulence.
“Following strong issuance levels in 2007, when volume records were set in both the municipal and the corporate sectors, the consensus for 2008 reflects a slowing economic pace and continued concerns about the housing market,” said Michael Decker, senior managing director of research at SIFMA. “While risks will remain, we forecast improvement beginning in mid-2008 as the operating environment improves and the current negative conditions have been fully factored into the markets.”
Key drivers for 2008 are the length and severity of the mortgage market and housing weakness; the magnitude of additional housing and structured finance credit losses and capacity for capital replenishment; success of initiatives to free up interbank lending and credit markets; and the degree to which bad news has already been reflected in financial market pricing.
SIFMA’s survey projects long-term municipal issuance will fall close to 5 percent from 2007 levels, to $405 billion. This is based on the expectation that refunding activity will decline from 35 percent of total long-term issuance in 2007 to 22 percent in 2008, which translates to a sharp decline from $150 billion to $89 billion. The lower projected refunding level reflects an expectation of reduced volume of debt available for refunding in the coming year. Conversely, new money issuance is expected to rise from $275 billion to $316 billion. Total municipal issuance is projected to be $456 billion in 2008, a modest decline from the record $482 billion issued in 2007.
Corporate bond issuance is expected to be $965 billion, near historically high levels, although that figure reflects a 14.8 percent decline from 2007 issuance levels. Drivers include higher financing needs as corporate profits begin to slow and all-in borrowing costs at still relatively attractive levels. High-yield and investment-grade issuance are both expected to fall around 15 percent in 2008, to $115 billion and $850 billion, respectively.
The outstanding commercial paper volume is forecast to decline slightly, from $1.86 trillion in November, 2007 to $1.76 trillion in 2008. While financial asset-backed commercial paper is expected to decline an additional 16 percent, outstanding non-financial commercial paper is projected to rise more than 15 percent as a result of Federal Reserve and other central bank initiatives to free up liquidity in the short term and inter-bank funding markets, demand for corporate acquisition and business capital investment funding.
Asset-backed securities (ABS) issuance is projected to decline 36 percent in 2008, to $325 billion from $507 billion in 2007. Home equity loans, previously the largest component in the ABS sector, are projected to experience a 72 percent decline, from $222 billion to $63 billion, attributable to depressed pricing as credit spreads remain at historically wide levels. Credit card receivables are projected to replace home equity loans as the largest ABS sector, at $90 billion in 2008, a modest decline from the record level of $95 billion in 2007.
Total mortgage-related securities issuance is expected to decline close to 13 percent in 2008, to $1.7 trillion. The three dominant themes in this sector build on the mortgage trends in 2007: lower issuance indicative of the weakness in the housing and residential mortgage credit sectors, agency mortgage-related securities becoming the dominant source of issuance, and prime mortgage-backed securities (MBS) comprising a much larger share of private label issuance. As explained in SIFMA’s recent annual economic outlook survey, the housing decline is expected to moderate in the latter half of 2008, with home prices “bottoming out” in 2009.
The survey also projects the S&P 500 equity index to rise to 1,600 by the end of 2008. The principle driver propelling equity prices is expected to be historically low interest rates. The equity market outlook, however, is constrained by credit market liquidity conditions and pressure on corporate profits.
The report is available at http://www.sifma.org/research/pdf/usMktOutlook0108.pdf
