Net issuance of bonds into the U.S. market in Q1 2006 surpassed prior records, forcing bond prices to fall and rates to rise.

Total, annualized net sales for corporate and foreign bonds, agencies, treasuries and municipal bonds reached $2.2 trillion, 70% higher than bond issuance in 2005.

There are several reasons for this record level of bond issuance:

  • Issuance of Treasury bonds, which seems to be seasonal, was running higher in the first quarter of the year;

  • Issuance of agency bonds, which had fallen sharply after the accounting scandals at Fannie Mae in 2004, was now returning to normal levels;

  • Bonds issued by domestic corporations were at record levels, primarily because of the desire to raise money to pay for stock repurchases.

Net Issuance: US Bond Markets
Net Issuance: US Bond Markets

In 2005, net issues of agency and GSE-backed securities were only 7.8% of levels of 2001, when Fannie Mae was in her heyday, aggressively flogging mortgages to the masses.

In 2005, net issues of agencies were only $50.7 billion, indicating that this sector had become far less important in the fixed income market than at any time in the last decade. (See: Federal Reserve national flow of funds account F210.)

However, Fannie Mae and her kin are not dead and are coming back.

In Q4 2005, net issues of agency securities rose to $377.3 billion (annual rate).

This was still only 58.7% of the rate of net issues in 2001, but is a definite proof of life.

Much of the mortgage securitization business that was handled by the agencies went to issuers of asset-backed securities, controlled by commercial banks, after the government put restrictions on Fannie Mae, encouraging CEO Franklin Raines to step down.

As the agencies get their capitalization and accounting in order, competition in this segment of the fixed income market can be expected to heat up.


Total mortgage borrowing fell 6.6% during Q4 2005, compared to the previous quarter, according to Federal Reserve flow of funds table F217.

Mortgage borrowing by households fell even more, down 11.7% compared to Q3 2005.

Two-thirds of mortgage financing came from agencies (e.g., Fannie Mae) and issuers of asset-backed securities.

The rapid withdrawal of borrowers from the home mortgage market, as interest rates rose in Q4 2005, suggests that much of the borrowing over the last year or so was probably opportunistic, stimulated by low interest rates and aggressive marketing (e.g.,


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