Capital Markets

Uptick in Bond Issuance Seen for 2006

However, higher interest rates are expected to reduce the amount of asset-backed securities issued for the first time since 1999.
Stephen TaubJanuary 10, 2006

Corporate bond issuance has gotten off to a fast start in 2006. According to a new survey by the Bond Market Association, the volume of corporate bonds, CDOs, and commercial paper is expected to increase, at least somewhat, for the full year.

Fueled by strong business spending, corporate bond activity should rise 1.6 percent, to $719 billion, according to the median of survey responses.

As for total bond underwriting, the trade group is forecasting a 13.3 percent decline for the full year. However, this falloff is expected to be heavily driven by sectors like mortgage-related securities.

The backdrop for these forecasts is the expectation of continued expansion in the U.S. economy, which will help increase issuance volume in some corporate sectors. The anticipation of higher interest rates, however, is likely to hurt volume in other parts of the market, according to respondents.

“Rising interest rates will hurt interest-rate-sensitive sectors such as housing and refunding activity in the municipal bond market the most,” said Micah S. Green, the association’s president and chief executive officer, in a press release. “On the other hand, other parts of the market, like corporate bonds or asset-backed securities tied to auto loans, should benefit from sustained economic growth and increased business and consumer spending.”

Indeed, on Tuesday Johnson Controls Inc. priced a $2.5 billion, four-part offering in floating-rate and fixed-rate notes. The net proceeds will be used to refinance commercial paper issued for the December acquisition of York International Corp.

According to the BMA survey, higher interest rates are expected to reduce the amount of asset-backed securities issued this year for the first time since 1999, mostly due to a decline in the issuance of securities tied to home equity loans.