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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An understanding of the motivation of issuers is fundamental in Capital Flow Analysis.

The U.S. bond market may be divided into four types of issuers, with this breakdown over the decade 1995-2004:

1. F209. Treasury Bonds (8.9% of bond issues);
2. F210. Agency Bonds (39.5% of bond issues);
3. F211. Municipal Bonds (6.9% of bond issues); and
4. F212. Corporate Bonds (44.7% of bond issues).

Each of these bond classes is governed by different parameters:

1. Primary Decision Maker: Who is it that makes the primary decision that results eventually in the issuance of these bonds?
2. Lag Between Decision and Issuance: How long is it between the time when the primary decision maker takes action that later results in these bonds being issued, and the actual issuance of the bonds?

3. Sensitivity to Interest Rates: How much is the primary decision maker influenced by current interest rates before taking the action that leads to the issuance of these bonds?

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