Overall bond issuance in the United States is expected to decline 4.3% to US$4.4 trillion in 2007 according to an annual survey by the Securities Industry and Financial Markets Association.

SIFMA said that the slight drop in issuance from 2006 is due in part to the effect of the housing correction on securitized product sectors and a moderating of corporate bond issuance from its record 2006 level.

Survey respondents project U.S. economic growth to continue at a below trend pace at the start of 2007 before picking up later in the year with the completion of the housing correction. The Fed is expected to keep rates at their current levels with the possibility of a rate cut in the first half of the year. “Credit market conditions should stay in place early in the 2007 with spreads potentially widening later in the year as the pace of corporate profits slows from double to single digit percent growth and default rates move closer to historical averages,” it suggests.

Despite the projected dip in overall bond issuance, the market for collateralized debt obligations is expected to have a record year in 2007 and the level of commercial paper outstanding is also expected to increase. Corporate, asset-backed and mortgage-related issuance are all expected to decline in the year ahead. In addition, the outstanding volume of commercial paper is expected to increase during 2007.

“While total issuance in the U.S. is projected to be lower this year, credit market conditions in the current economic environment continue to be quite favorable,” said Michael Decker, interim co-head of research with SIFMA. “These conditions are supported by strong credit quality metrics, ample market liquidity and investors maintaining a healthy appetite for credit products.”

The CDO market is expected to continue its growth trajectory into 2007 with funded CDO issuance expected to reach US$369 billion, a 12.1% increase over the previous record volume of US$330 billion in 2006, according to the survey. The projected growth in 2007 will remain broad based and easily digested in the market due to demand from institutional investors, including new investors and hedge funds, it said. Collateralized loan obligations are likely to be the leading sector within the CDO market, reaching US$109 billion in 2007 as the sector continues to benefit from factors such as cyclically low default rates, strong corporate cash flow and strong balance sheet trends.

While corporate bond issuance is expected to moderate in 2007, the projected volume of US$889 billion would still be the second highest issuance total on record, topped only by US$1.04 trillion in 2006. The substantial growth in corporate supply during 2006 was led by a surge in M&A and leveraged buyout activity along with strong business capital investment spending and substantial refinancing volume of existing debt, it explained. “While these trends are likely to stay in place early in 2007, supportive market conditions will likely wane later in the year as the economy grows at a more moderate pace and default rates slowly increase from current historically low levels, but still remain below the long-term average default rate,” it said.

Total municipal bond issuance is also expected to decline slightly, with the median forecast projecting US$395 billion in 2007, a 7.7% drop from 2006. The lower expected issuance total is the result of reduced refunding volumes in expectation of potentially higher rates and a smaller volume of debt available for refunding. However, new money issuance is expected to increase in 2007 from 68% to 75% of total long-term issues, which would represent an increase from US$257 billion to US$275 billion.

According to the report, issuance of mortgage-related securities will also decline modestly from 2006 levels and are projected to reach US$2.07 trillion in 2007, a 2.6% decline from US$2.12 trillion in 2006. “While the most intense phase of the housing downturn has likely concluded, the overall housing sector correction is not yet complete. In addition, new mortgage origination could be slowed by a projected increase in the interest rate for a 30-year fixed rate mortgage from 6.2% at the end of the first quarter to 6.5% by the end of the year,” the survey suggested.

“Although the housing downturn will probably continue through the first half of 2007, mortgage rates are still low by historical standards and the economic effect of the correction has so far been mitigated by rising employment and personal income,” commented Decker.

@page_break@The housing correction will also have an impact on the asset-backed market as reduced volumes of home equity loans will result in a decline of overall ABS issuance this year for the first time since 1999, it predicted. The median forecast projects ABS issuance to reach US$715 billion in 2007, down from the US$750 billion issued in 2006. Despite decelerating housing price trends and reduced home sale volumes, other consumer related sectors such as auto loans and credit cards are expected to pick up, it added.

The median forecast has auto loan ABS increasing 4.9% from 2006 to reach US$85 billion in 2007. Despite anticipated soft auto sales in 2007, issuance is projected to rise as banks and finance companies, including auto credit facilities affiliated with automakers, use auto securitizations as a funding source. Credit card securitization is projected to increase 9.0% to US$73 billion.

Outstanding commercial paper is expected to increase to US$2.17 trillion in 2007, a 12.5% jump from the total outstanding at the end of November 2006. The projected increase is largely the result of the expectation for continued moderate GDP growth, business investment spending growth and sustained levels of M&A activity, it noted.