NEW YORK--(BUSINESS WIRE)-- The U.S. bond market's positive rating drift in 2011 came to an abrupt halt in the third quarter as a new surge in financial sector downgrades pushed up the share of the market downgraded to 2% (on $73.8 billion) from 0.7% in the second quarter, according to a new Fitch Ratings report. Simultaneously, volatility associated with the European debt crisis affected issuance and economic activity -- upgrades contracted to 1% of market volume (on $37.8 billion) from 2.5% in the prior quarter.

Across industrials, rating trends remained positive. In fact, the gap between upgrades and downgrades widened at the investment grade level with 1% of high grade industrial volume upgraded and 0.1% downgraded. Across the speculative grade universe, par upgrades continued to top downgrades but by a far smaller margin than in prior quarters (1.9% upgraded versus 1.3% downgraded in the third quarter, versus 7.1% and 1.4%, respectively, in the second quarter).

The third quarter saw the downgrade rate among investment grade financial institutions climb to 5.4%, the highest single quarter downgrade rate since 2009. Upgrades continued to be minimal. The new spike in downgrades caused the financial rating mix to further deteriorate with the share of bonds rated 'AAA' or 'AA' declining to 22.1% from 26.3% at the end of June. Third-quarter downgrades consisted mostly of moves to the 'A' category, which increased in size from 49% of financial volume to 53.5%.

The par-weighted average coupon of investment grade industrial bonds sold in the third quarter was 3.5% versus 4.1% in the second quarter. On far more limited activity, the par-weighted average speculative grade coupon rose to 8.3% from 7.6% in the second quarter.

At the end of September, the U.S. corporate bond market stood at $3.9 trillion in size, split $1.3 trillion financial / $2.7 trillion industrial. At the end of 2007, the financial and industrial mix was practically even at $1.9 trillion each. The largest nonfinancial sectors are utilities, 9.3% of market volume; energy, 7.8%; healthcare and pharmaceutical, 6.7%; and telecommunication, 6%.

For additional details please see 'U.S. Corporate Bond Market: A Review of Third-Quarter 2011 Rating and Issuance Activity' available on Fitch's web site under the Credit Market Research link.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research: U.S. Corporate Bond Market: A Review of Third-Quarter 2011 Rating and Issuance Activity

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=653796

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