SIFMA Projects Dip in Fixed Income

The Securities Industry and Financial Markets Association (SIFMA) said that it is forecasting a median 15% dip in fixed income issuance this year, to $3.4 trillion from the estimated $4.0 trillion issued in 2007. These estimates are contained in the association's 2008 U.S. Market Outlook. Issuance should dip considerably in the sectors most affected by the fallout in subprime mortgages. The forecast is based on a SIFMA's survey of member firms. The association also projects a slower but positive GDP growth in 1H08 as well as a pick up in the second half of 2008 with the economy expected to work through the current housing and credit market turbulence. "Following strong issuance levels in 2007, when volume records were set in both the municipal and the corporate sectors, the consensus for 2008 reflects a slowing economic pace and continued concerns about the housing market," said Michael Decker, senior managing director of research at SIFMA. "While risks will remain, we forecast improvement beginning in mid-2008 as the operating environment improves and the current negative conditions have been fully factored into the markets." Among the key drivers for 2008 are the length and severity of the mortgage market and housing weakness, the magnitude of additional housing and structured finance credit losses and capacity for capital replenishment, success of initiatives to free up interbank lending and credit markets as well as the degree to which bad news has already been reflected in financial market pricing. SIFMA estimates outstanding commercial paper volume to dip from $1.86 trillion in November 2007 to $1.76 trillion in 2008. While ABCP is projected to drop an added 16 %, outstanding nonfinancial commercial paper should increase more than 15% because of Federal Reserve and other central bank initiatives to free up liquidity in the short term and inter-bank funding markets. There is also the demand for corporate acquisition and business capital investment funding, according to SIFMA. ABS issuance should drop 36 % this year to $325 billion from $507 billion in 2007. Home equity loans, formerly the biggest component in the ABS sector, are projected to have a 72% dip from $222 billion to $63 billion as a result of depressed pricing as credit spreads remain at historically wide levels. Credit card receivables are projected to replace home equity loans as the largest ABS sector, at $90 billion in 2008, a dip from the record level of $95 billion in 2007. Total mortgage-related securities issuance is expected to decline close to 13% in 2008, to $1.7 trillion. SIFMA said that the three main themes in this sector build on the mortgage trends in 2007: lower issuance indicative of the weakness in the housing and residential mortgage credit sectors, agency mortgage-related securities becoming the main source of issuance, and prime MBS making up a much larger share of private label issuance. SIFMA said that the housing dip should moderate in the latter half of this year, with home prices "bottoming out" in 2009. SIFMA also projects the S&P 500 equity index to rise to 1,600 by the end of 2008. The main driver for equity prices is expected to be historically low interest rates. The equity market outlook, however, is constrained by credit market liquidity conditions and pressure on corporate profits, the association said. SIFMA's survey also projects long-term municipal issuance will fall close to 5% from 2007 levels, to $405 billion. Also, corporate bond issuance should be $965 billion, which is near historically high levels, although that figure reflects a 14.8% drop from 2007 issuance levels.