International bond issuance surges in Q2-BIS

By Andrew Hurst, European Banking Correspondent

ZURICH, Sept 2 (Reuters) - Issuance of international bonds, especially those in yen, jumped in the second quarter of 2007, partly driven by corporate borrowing in the United States and Europe, the Bank for International Settlements (BIS) said.

A surge in the amount of new bonds being floated, with net issuance of 1 trillion, took the year-on-year rise to 18 percent from 8 percent in the first quarter, the BIS said in a statement.

The total amount of bonds and notes outstanding now amounts to nearly $20 trillion, double the amount only four years ago.

While bond issuance has been growing rapidly, total crossborder lending by banks expanded even faster, rising by $2.2 trillion in the first quarter of 2007 to $28.5 trillion, pushing the annual growth rate to more than 20 percent for the first time since 1987.

BIS reporting of bank lending lags its tracking of international bond issuance by a quarter. The period covered by the report predates recent turmoil in financial markets. Private non-bank financial institutions accounted for 48 percent of global net bond issuance with $200 billion from United States borrowers and $158 billion in net issuance by euro-area institutions in the second quarter, said the BIS.

Yen-denominated bond issues were mainly driven by new bonds and notes from U.S. and euro-area private financial institutions.

Banks in the United States borrowed $14 billion in yen bonds and notes, almost twice the previous record high, and double the amount of yen securities issued by Japanese firms.

BIG NET TRANSFER FROM UK TO US

Net bond issuance from the emerging economies of Asia, Latin America and Europe was strong but sovereign borrowing remained subdued, consistent with a secular shift towards non-government debt in emerging markets, the BIS said.

Growth in international bank borrowing also fuelled an extraordinary volume of net flows through the international banking system.

The biggest net transfer of funds in the first quarter, amounting to $197 billion, was from residents of Britain to those in the United States, due mainly to increased lending to U.S. non-banks.

But the net inflow from Britain into the United States was largely offset by net outflows from the U.S. to Caribbean offshore centres, Switzerland and the euro area.

Lending to emerging markets accelerated with emerging Europe taking 37 percent of $156 billion in new lending, followed by Asia-Pacific with 33 percent, Latin America, 21 percent, and Africa and the Middle East with 9 percent.

"Within a decade, emerging Europe has overtaken the other emerging regions as the one to which the BIS reporting banks extend the greatest share of gross credit," said the BIS.

The increase in credit to non-bank borrowers has led to a shift in banks' exposure to emerging market borrowers with much of the move driven by increased lending to emerging Europe.

Austrian and Italian banks have the biggest exposures to emerging Europe while German, French and Belgian bank exposures have been rising as well, said the BIS.

Turning to the derivatives markets, the BIS said combined turnover of interest rate, currency and stock index derivatives stood at $536 trillion between April and June, only slightly higher than in the previous three months.

But trading of futures and options on stock indices hit a new high of $68 trillion in the second quarter, up 13 percent on the first quarter, reflecting mainly valuation effects.