The Securities Industry and Financial Markets Association today reported that issuance of new securities in the U.S. capital markets rose 13% in the first quarter, to US$1.8 trillion.

SIFMA said that merger and acquisition and leveraged buyout financing is driving corporate bond issuance to a record US$308.0 billion, up 23.6% from the same period last year. In addition, as a result of increased bond refunding activity, municipal issuance rose 50.8% from year-ago levels to US$112.8 billion, also setting a record in the first quarter.

Total equity underwriting reached US$61.4 billion on 202 deals in the quarter, 42.6% higher than the first quarter of 2006.

“The main drivers of higher issuance in the first quarter were M&As and LBOs in the corporate bond sector and low interest rates and a flat yield curve, which spurred new sales of municipal bonds and mortgage-backed securities,” said Michael Decker, senior managing director for research and public policy at SIFMA.

“Looking forward, we see continued favorable market conditions,” Decker added. “Weakness in the housing sector appears to be contained. The interest rate environment is stable, the economy continues to grow, and corporate profit growth is still on track. In addition, a healthy stock market and positive corporate credit trends will support continued growth in securities issuance.”

Net new corporate bond sales rose as gross issuance exceeded redemptions by a wide margin in the first quarter, with refinancing at about a third of high yield issuance, the lowest level in 25 years, SIFMA said.

By contrast, high-yield financing for mergers and acquisitions and leveraged buyouts are on pace to account for the largest share of total high-yield issuance in 18 years, it noted. Ample market liquidity and sustained profit growth will continue to provide the foundation for corporate financial strength and supportive credit conditions, the SIFMA report states. SIFMA anticipates corporate bond issuance to end the year at a level comparable to 2006’s record of US$1 trillion.

Record municipal bond issuance in the quarter was driven by a higher refunding volume, which rebounded from late-2006 levels and accounted for nearly half of the total long-term issuance. Local and state government financing of general government operations, education, transportation and infrastructure projects will continue to lead municipal issuers to the capital markets, it predicted. In addition, in some regions the softer housing market may lead to increased issuer demand for municipal bond mortgage financing programs to enhance housing affordability.

Mortgage-related securities issuance recovered in the first quarter to total US$552.1 billion, the highest level since the second quarter of 2005 suggesting the sector, particularly securities backed by conforming mortgage loans, is beginning to regain strength, SIFMA said. “At this point, the subprime sector weakness appears to be fairly well contained,” it noted. Asset-backed securities issuance reached US$297.3 billion in the quarter, an increase of 3.3% from last year’s first quarter, and global collateralized debt obligation, or CDO, issue volume rose 46.8% to US$158.4 billion.

Treasury securities issuance declined 20.4% in the quarter from year-ago levels to US$125.7 billion, the result of reduced Treasury funding requirements as tax revenue growth lowered the federal budget deficit. SIFMA’s quarterly survey of government bond researchers and strategists forecasts the fiscal year 2007 deficit to decline to US$191 billion this fiscal year. Federal agencies’ issuance in the quarter rose to US$262.7 billion, up from the US$187.9 billion issued in the first quarter last year.

In addition, total outstanding money market volume continued to rise to US$4.11 trillion at the end of the quarter. There was a strong net inflow of new money into both fixed-income and equity mutual funds in the quarter.