Ratings Ugrades outpaced downgrades in the U.S. bond market in the first quarter of 2007, according to a new report from Fitch Ratings.

The par value of U.S. corporate bonds affected by upgrades totaled US$106.3 billion in the first quarter of 2007, or 3.2% of market volume, while downgrades affected US$25.3 billion in bonds, or 0.8% of market volume. Upgrades were particularly robust across the pool of highly rated banking and finance issues with US$80.9 billion in upgrades.

Excluding the financials, rating activity across investment grade industrial bonds remained net negative; with downgrades (US$16.4 billion) continuing to top upgrades (US$3.1 billion). “At the speculative grade level, however, industrials fared better with upgrades of US$23.6 billion surpassing downgrades of US$8.3 billion in the first quarter,” said Paul Mancuso, senior director of Credit Market Research.

For the U.S. bond market overall, first-quarter upgrades were concentrated in the following sectors: banking and finance US$80.9 billion, 5.5% of sector volume; energy US$9 billion, 5.1% of sector volume; utilities US$3.3 billion, 1.2% of sector volume; and, telecommunication US$2.3 billion, 1.4% of sector volume.

Leading first quarter downgrades: telecommunication US$5.1 billion, 3.0% of sector volume; health care and pharmaceutical US$3.5 billion, 3.2% of sector volume; transportation US$3 billion, 3.3% of sector volume; and, food, beverage and tobacco US$2.4 billion, 3.0% of sector volume.

New issuance totaled US$231 billion in the first quarter of 2007, up 12% compared with 2006’s first-quarter tally of US$207 billion, Fitch reported. The quarter’s strong results were mostly driven by the financials, it noted, as new issuance rose to US$146.7 billion compared with US$112.2 billion in the first quarter of 2006. Industrial issuance across both the investment and speculative grade rating categories was, in contrast, down year over year. Investment grade industrial issuance totaled US$52 billion, down from the US$62.3 billion recorded in the first quarter of 2006, while industrial speculative grade issuance contracted slightly to US$31.8 billion from US$32.1 billion in the first quarter of 2006.

At the end of March, the U.S. corporate bond market totaled US$3.6 trillion in size, split 82% investment grade/18% speculative grade, Fitch said. However, the share of industrial bonds (excluding the highly rated financials) carrying speculative grade ratings stood at 31%.

“Given the surge in LBOs and other shareholder-oriented transactions, the share of industrial volume rated speculative grade is expected to continue to rise this year,” said Mariarosa Verde, managing director of Credit Market Research.

The bulk (US$283.4 billion) of U.S. bond volume scheduled to mature through year end (in total US$298.4 billion) consists of investment grade bonds, with the remaining US$15 billion speculative grade issues. Approximately 2.3%, 4.0% and 6.3% of speculative grade volume is scheduled to mature in 2007 (9 months), 2008 and 2009, respectively.