The Securities Industry and Financial Markets Association reported that US bond issuance increased to US$6.13 trillion in 2006, the second highest volume ever, up from the US$5.71 trillion issued in 2005.

Corporate bond issuance reached a record-setting US$1.05 trillion, increasing by close to 40% from year-ago levels, and issuance of asset-backed securities also set a new record for the year. Treasury coupon issuance increased 4.6% to US$780.8 billion for the year on a higher volume of refunding of maturing debt in 2006. Equity indices rose during the year with the Dow setting a record, and lower rated and high yield corporate bonds were the top performing fixed-income asset classes in 2006.

“The big drivers of activity in the bond markets last year were healthy economic growth, low long-term interest rates, favorable credit conditions, and a global abundance of capital seeking investment opportunities,” said Michael Decker, head of research and public policy at SIFMA. “Looking forward we expect issuance volume to remain strong and close to the 2006 levels, as many of the same financial market conditions remain in place as we begin 2007.”

Record-setting corporate issuance was supported by a number of market trends such as an increased volume of debt-financed corporate mergers and acquisitions, historically compressed credit spreads, the Fed’s ending its period of tightening in August, and the economy’s “soft landing”, SIFMA explained. Higher issuance was easily digested because of ample market liquidity and strong investor demand and risk tolerance, it added, noting that market liquidity has extended the cyclical peak in credit conditions.

Led by the home equity sector, comprising over 40% of the overall asset-backed securities market, ABS issuance reached US$1.23 trillion in 2006, surpassing 2005’s previous record of US$1.17 trillion, it noted. Global CDO issuance in 2006 nearly doubled from 2005 levels to US$488.6 billion, also a record, while mortgage-related securities issuance declined only slightly year-over-year, to US$1.93 trillion, supported by a continuation of historically low mortgage rates. The consensus view is that the housing correction should be completed this year, which should stabilize mortgage-affected sectors, SIFMA reported.

SIFMA expects the lower projected deficit will likely to restrain net Treasury borrowing in 2007. Money market volume outstanding totaled over US$4.06 trillion at year-end, with commercial paper outstanding at US$1.95 trillion and asset-backed commercial paper topping a US$1 trillion outstanding for the first time.

Long-term municipal issuance declined modestly to US$386.9 billion from 2005’s record levels despite a strong fourth quarter. Increased new bond financing issuance partially offset the decline in refundings earlier in the year, it said.

Investments in bond mutual funds surged in 2006 with a strong fourth quarter led by the corporate and municipal sector funds. Net inflows almost doubled to US$60.8 billion from US$30.8 billion in 2005. Bond fund flows benefited from supportive bond market conditions in 2006, especially in the fourth quarter, SIFMA added.

SIFMA also sees more room for growth in equities, noting the favorable performance in 2006 and into early 2007 with the Dow hitting a new high.