Fitch: U.S. Bond Market Par Rating Mix Continues Downward Drift.

NEW YORK -- Due mostly to lackluster rating performance at the investment-grade level, at the end of September, the U.S. bond market's concentration of investment-grade bonds fell below 80%, the lowest level in six years and likely longer, while the market's speculative-grade component reached nearly 21%, the highest level in at least six years, according to a new study released by Fitch Ratings. At the end of 2000, close to 84% of U.S. bond market volume was rated investment grade while just 16% consisted of speculative-grade bonds. In fact, excluding the highly rated financial sectors, the share of industrial investment-grade bonds contracted to 67% at the end of September from 74% at the end of 2000.

The market's negative rating drift had moderated in 2004 but gathered momentum in 2005 due to a number of large investment-grade downgrades. In the third quarter, for example, par downgrades for the U.S. bond market totaled $99.3 billion, of which $75.2 billion consisted of investment-grade downgrades. 'In contrast, par upgrades totaled $25.9 billion with just $6.9 billion consisting of investment-grade upgrades,' said Paul Mancuso, Senior Director, Fitch Credit Market Research. 'The investment-grade sector continued to experience meaningful downgrades and few upgrades.'

Added Mariarosa Verde, Managing Director, Fitch Credit Market Research: 'The market's downward rating drift has the potential to contribute to heightened volatility over the next several years, especially if we begin to see economic or funding shocks, since lower rated companies are naturally less stable and more vulnerable to default than their higher rated counterparts.'

In the third quarter, downgrades affected 3.2% of U.S. bond market volume while upgrades affected only 0.8%. At the investment-grade level, the share of bonds subject to downgrades was 3%, with less than half a percent experiencing upgrades. At the speculative-grade level, 4% of outstanding bonds suffered downgrades but 3.2% enjoyed upgrades.

This new report also takes a look at issuance patterns in 2005 and discusses trends for bonds coming due in 2006. Of note, U.S. bond maturities are set to rise 20% in 2006 compared with 2005.

The report is titled 'U.S. Bond Market: Par Rating Mix Moves Deeper Into Non-Investment Grade Territory' and is available on the Fitch Ratings web site at www.fitchratings.com under the 'Credit Market Research' link.

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