Consistent with a leveling of the rate of increase in the US trade deficit in 2006, the price of investment grade corporate bonds has been holding steady, as the graph indicates.

Driven by a trade deficit that has been increasing since the early 1980s, the persistent flow of funds into the US bond market has caused bond yields to fall. (See: “Trade deficits have depressed bond yields for 20 years.”)

The graph suggests that from a long-term perspective, corporate bond yields in recent months have been flattening out to match the reduction in growth of the trade deficit, rather than moving along with Federal Reserve short-term interest rates.

	Long Down Trend in AAA Corporate Bond Yields

Massive issuance of bonds by non-financial corporations, largely to finance an extraordinary level of stock buybacks, helped force bond interest rates upwards in Q1 2006. (See Flow Table F212).

The annualized rate of bond issuance by non-financial corporate business rose to $240.4 billion in Q1 2006, four times the issuance rate of 2005.

The graph shows that, for years, the principal issuers of corporate bonds into the U.S. market have been the financial sectors (green bars) — mainly issuers of asset-backed securities raising funds for mortgages and consumer finance.

	Principal Issuers of Corporate & Foreign Bonds

Non-financial Corporations Raise Money For Buybacks

The annualized rate of issuance of corporate bonds by the financial sectors rose from $679.3 billion in 2005 to $725.4 billion in Q1 2006, while the financial sector’s share of the issuance market fell from 90% to 70% due to the extraordinary level of bonds issued by non-financial corporations.

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One of the most entrenched principles of securities market supervision is ‘non-merit regulation’ — a guiding light of the Securities and Exchange Commission since its founding in 1934.

The idea behind ‘non-merit regulation’ is that the SEC should focus efforts on getting issuers and intermediaries to provide disclosure of material facts about securities being marketed and traded, leaving it to investors to decide whether a security is a good investment or not.

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