published: 8.10.04

Bond Issuance Stable in Q2 at $1.45 Trillion

Markets Make Successful Transition to Emerging Interest Rate Environment

Indications of sustained economic growth characterized the bond market environment during the second quarter. Despite the moderately higher rates during much of the quarter, bond issuance in the second quarter reached $1.45 trillion, compared to the $1.46 trillion over the first quarter. The bond market issuance level is attributable to recovery in mortgage-related securities issuance and continued substantial growth in the asset-backed market. There continues to be a steady issue supply coming to market in the corporate, municipal and government bond markets. Issuance for the first half of 2004 totaled $2.91 trillion, about 19 percent less than the first half of 2003, when rates were at near-record low levels. As we enter the third quarter, several trends bode well for the markets. Concerns about oil prices and the July employment data led to lower interest rates in early August. While rates are expected to move up, they are likely to rise at a moderate pace. The Fed has signaled its intention to maintain a "measured" response but ready to act more aggressively if circum-stances warrant. The budget deficit is expected to peak in this fiscal year and then decline. Mortgage demand remains robust and continues to outperform expectations despite interest rate movements. With increased corporate profits, cash flow and balance sheet restructuring, corporations are well positioned to tap the markets should the recent gains in business capital spending continue. Especially considering interest rate volatility this year, the bond markets have responded well to sustained economic growth and should continue to make the transition to the emerging interest rate environment. more...