As the U.S. economy expands and the Federal Reserve continues its gradual uptick on medium- to long-term interest rates, overall bond issuance is forecasted to decline 13.3% to $3.56 trillion in 2006, compared to $4.10 trillion in 2005, according to results from a recent Bond Market Association survey. However, while issuance is expected to fall in interest rate-sensitive sectors, it is anticipated to either stay steady or rise in others that are not driven by rate fluctuations.
It is projected higher rates will have the greatest effect on MBS issuance, according to the BMA's 2006 credit market issuance outlook. Mortgage-related issuance is expected to fall 20.2% to $1.68 trillion in 2006, compared to $2.10 recorded in 2005. The estimate comes in light of rising mortgage rates and a slower growth in the housing sector.
In addition, long-term municipal issuance is predicted to total $352 billion, a 13.5% decrease from the $407 billion reported in 2005. ARM mortgage-related issuance is also expected to drop 26.7% to $633 billion due to higher initial rates and adjustments related to higher short-term rates. Agency MBS and CMO issuance are both slated to decrease by 17.5% to $755 billion and $260 billion, respectively. Non-agency MBS is expected to decrease in 2006 to $664 billion, down 23.9% from the previous year. Although a sharp fall in issuance is anticipated in the mortgage area, it will still be the fifth highest issuance year for the sector, according to the report.
ABS issuance is also expected to decline for the first time since 1999. It will fall 12.5% to $636 billion from $727 billion issued in 2005, according to the survey.
"ABS will be down, but that's because the largest sub-sector within ABS is home equity loans," said Michael Decker, senior vice president and head of research and policy analysis at the BMA. "Home equity loans issuance is driven to a larger extent by real estate evaluations. There's an expectation that the run-up in home values will slow so you'll see less home equity loan and home equity line borrowing and that'll be reflected in lower issuance in that area."
Auto loan, credit card receivable and other collateral sub-sectors within ABS are expected to rise, however.
Based on the survey, cash CDO issuance is expected to increase by 8.8% to $173 billion, compared to $159 billion issued in 2005. Leveraged loans will account for about 40% of the total cash issuance in this sector with a projected $63 billion in issuance, a 12.5% rise from 2005, according to the report. In addition, synthetic CDO issuance will be $80 billion in 2006.
Corporate bond issuance, including investment grade and high yield securities, is predicted to increase slightly to $719 billion, a 1.6% increment from the $708 issued in 2005.
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