published: 5.13.04

Overall Bond Issuance Slips From Last Year's Record Highs; Market Rotates to Credit Sensitive Sectors in Q1 2004 with Corporate Bond Issuance Up 28% and Asset-Backed Securities Rises 38.3%

Date: May 13, 2004
Contact: Emily Brunner, 646.637.9268
Peter Roberson, 202.434.8436

New York, NY - New issuance activity in U.S. bond markets reached $1.46 trillion in the first quarter, about 15 percent lower than the same period a year ago but roughly the same as the fourth quarter of 2003. Although rising interest rates have slowed issuance from record highs, the quarter was still the sixth highest ever. At the same time, stronger economic fundamentals have caused the markets to rotate to securities that are credit quality sensitive. Corporate bond issuance, for example, rose 28 percent from the fourth quarter of 2003 to $219.5 billion. Issuance of asset-backed securities climbed 38.3 percent to $187.6 billion.

"Sustained economic growth and its impact on Fed policy and interest rates are clearly dominating the market environment," said Micah S. Green, president of The Bond Market Association. "Overall issuance is down from record highs but, at the same time, improving credit quality and stronger corporate profits are leading to an increase in the asset-backed and corporate markets. We expect to see a continued demand for capital in these sectors as well as a continuing need for debt financing in the municipal bond and Treasury markets."

Almost all of the year-over-year decline in issuance stems from a sharp drop in mortgage market activity. Mortgage related issuance dropped from $776.1 billion in the first quarter last year to $404.4 billion in the first quarter of this year as home owners reacted to rising interest rates by aborting their rush to refinance outstanding mortgages. If one excludes mortgage market activity, overall bond market issuance actually climbed compared to a year ago.

"Investors and issuers are both in the process of adjusting to developing market conditions," said Mr. Green.

The asset-backed securities market, on the other hand, maintained its remark-able growth through the first quarter of 2004, with issuance totaling $187.6 billion, up 38.3 percent, primarily fueled by an increase in home equity loans, still historically low interest rates and product expansion. The anticipated continued rise in interest rates, however, poses a challenge for maintaining the rate of growth in 2004 as home equity loan activity may subside. However, asset-backed securities products, such as credit card receivables and auto loans, could benefit as the economy continues to improve and spending increases.

The supply of new corporate bonds increased significantly during the first quarter of 2004, rising 28 percent from the fourth quarter of 2003 to $219.5 billion. The strong issuance volumes benefited from favorable market conditions - solid economic expansion, historically low interest rates, muted inflation, and the effect of accommodative fiscal and monetary policies. Corporate bond supply is likely to be sustained in the next few months by economic expansion and capital spending growth.

In addition, supported by the favorable credit quality trends, investment grade spreads are the tightest in nearly five years. On the other hand, should rates remain volatile, it is unclear what the impact will be on spreads after such a protracted rally in corporate bonds.

Treasury coupon issuance showed modest growth in the first quarter, rising a scant one percent from the fourth quarter last year, which may reflect higher tax revenues. Issuance totaled $215.9 billion during the quarter. Treasury expects to borrow a net $38 billion in the second quarter, compared to the actual net borrowing of $89 billion for the first quarter and an earlier projected second quarter levels of $75 billion.

Other survey highlights include:

-- In a special issue on Asia-Pacific Securitization, this edition of the re-search quarterly finds that total issuance in 2003 surpassed the 2002 record by 14 percent, with Australia accounting for nearly 100 percent of the growth as Japan and Korea scaled issuance back to 2002 levels. Favorable recent trends in the region should sustain growth in 2004 and beyond.

-- Federal agencies long-term decreased slightly to $335.9 billion in the first quarter of 2004 when compared to the first quarter in 2003.

-- Total municipal issuance totaled $93.4 billion in the quarter, unchanged from last year.

-- Mortgage-related securities issuance decreased to $404.4 billion in the first quarter of 2004, down from the $776.1 billion issued one year ago.

The Bond Market Association, with offices in New York, Washington, D.C., and London, represents securities firms and banks that underwrite, trade and sell debt securities and other financial products globally.

The full research quarterly can be viewed by visiting the Bond Market Association website, www.bondmarkets.com.