The Securities Industry and Financial Markets Association reported that issuance of new securities in the U.S. capital markets rose to US$3.57 trillion in the first half of 2007, a 10.4% increase over the first half of 2006.

Long-term municipal issuance and corporate credit issuance posted first half records. Asset-backed securities issuance declined on weakness in the lower quality credit mortgage sectors, and global CDO issuance in the first half of the year increased on a year-over-basis but declined in the second quarter due to the downturn in the subprime mortgage market and the onset of reduced credit market liquidity.

Municipal bond issuance is on pace to break the US$408.2 billion record set in 2005, with total long-term municipal securities issuance totaling US$229.4 billion in the first half of 2007, SIFMA said. This represents a record for a first half and is 28.8% higher than the US$178.1 billion issued in the first half of 2006. Strong refunding volume drove issuance volume higher, contributing 43.0% of the total long-term volume compared to 33.4% in the first half of 2006.

“Issuance flourished in the second quarter as financial market conditions peaked,” said Michael Decker, senior managing director for research and public policy at SIFMA. “Looking ahead, the second half outlook is clearly being affected by much weaker market conditions, the result of spillover from the subprime market, credit risk repricing, and dramatically reduced liquidity which necessitated recent central bank actions.”

Corporate bond issuance set a new record in the first half of the year. Issuance volume rose in the first half to a US$647.3 billion quarterly record, a 22.7% increase over the first half of 2006. In the second quarter, the issuance volume increased 12.6% from the prior quarter to US$342.9 billion, and up 22.9% from US$278.9 billion in the second quarter a year ago. Market conditions have weakened significantly since the end of the second quarter, which has affected high-yield corporate bonds particularly hard. Corporate bond issuance, especially high yield issuance, dropped dramatically as a result in July, SIFMA noted.

The close of the second quarter marked the first time in the history of equity underwriting that there has been three straight quarters with over US$60 billion raised. The second quarter total reached US$69.4 billion on 250 deals, and the dollar volume was higher by 8.5% quarter- over-quarter.

Equity markets are also being affected by the credit market conditions, and this effect will be reflected in third quarter data, SIFMA said. Combining corporate debt (straight bonds and securitizations) and equity underwriting, the securities industry raised US$898.0 billion in the second quarter of 2007, down 2.3% from the previous quarter but up 5.3% from a year ago based on declines of 13.7% in ABS and 13.5% in non-agency MBS affected by subprime mortgage conditions.