According to the Securities Industry and Financial Markets Association, issuance of securities in the U.S. capital markets reached US$5.06 trillion in the first nine months of 2007, a 7.7% increase over the same period in 2006.

Third quarter issuance volume was US$1.33 trillion compared to US$1.92 billion in the second quarter of 2007 and US$1.51 trillion in the third quarter of 2006. Long-term municipal issuance continues at a record pace, boosted by refunding activity, SIFMA said.

It also noted that corporate bond issuance remains ahead of last year and on a record pace despite a sharp drop in high-yield issuance in the third quarter. Agency and mortgage-backed securities, asset-backed securities and collateralized debt obligations fell in the quarter on housing sector weakness and subprime mortgage market deterioration.

“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 US$324.4 billion, as compared to US$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, SIFMA said.

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, it noted. Total net issuance of U.S. Treasury securities, including bills and coupons, was US$92.3 billion in the first three calendar quarters of 2007, compared to a net issuance of US$110.9 billion in the same period of 2006.

Corporate bond issuance rose to US$881.1 billion in the first nine months of the year, an increase over the same period in 2006, and remains on a record pace despite a slow third quarter. However, heightened SIFMA said that 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, it added. Non-convertible investment-grade issuance increased 14.5% in the first three quarters of the year, to US$776.6 billion, higher that the US$678 billion issued during the same period a year ago. Despite a slow third quarter, high-yield issuance increased 17.4% in the first three quarters of the year, to US$104.5 billion. Reduced liquidity and credit market repricing led to a sharp third quarter decline in high-yield issuance to US$9.0 billion from US$23.5 billion in the third quarter of 2006.