Bond issuance and derivatives turnover were weak in the fourth quarter of 2007, according to the latest quarterly review from the Bank for International Settlements.

“After a relatively calm December that saw markets broadly unchanged, accumulating evidence of a real-side slowdown prompted a broad-based repricing of growth risk and associated shifts in policy expectations in January. While tensions in money markets eased somewhat during the period under review, weak U.S. macroeconomic data releases, combined with further large-scale bank writedowns and concerns about financial guarantors, increased the perceived chances of global financial stress spilling over into the real economy,” the BIS review noted.

“When investors realized that the economic fallout from the credit crisis might not be confined to the United States, asset markets sold off across the board,” it added. “While price reactions to credit market stress had previously been more pronounced among industrialized economies, concerns over a more widespread growth slowdown clearly began to weigh on many emerging financial markets over the period. Equity markets, including those that had shown previous resilience, recorded the most pronounced weakness.”

Net issuance of bonds and notes increased to US$487 billion from US$399 billion the previous quarter, but the year-on-year growth rate plunged to -45%, down even further from the -23% recorded in the third quarter, the BIS noted.

Net issuance of bonds and notes by financial institutions in developed countries was particularly weak at US$351 billion, down from the previous quarter’s US$363 billion, and about half the level of a year earlier, it said. By contrast, net issuance by non-financial corporate issuers was relatively robust at US$30 billion, which corresponded to a positive year-on-year growth rate of 21%.

The latest BIS statistics on trading in exchange-traded derivatives markets, for the fourth quarter of 2007, also indicate a substantial decline in activity. However, this marked a reversal from the third quarter, in which the turmoil in financial markets had resulted in the highest turnover on record. The largest fall was in derivatives on short-term interest rates, where turnover based on notional amounts decreased from the previous quarter’s US$535 trillion to US$405 trillion in the fourth, it reported.

Declines were also evident for derivatives on long-term interest rates and stock indices and foreign exchange derivatives. Total turnover in listed futures and options on all financial instruments fell from US$681 trillion to US$539 trillion in the fourth quarter, although the year-on-year growth rate remained at a high level of 25%.

Activity in the international banking market continued to expand in the third quarter of 2007, amid growing tensions in the interbank market in various segments. The cross-border claims of reporting banks expanded to US$32 trillion, contributing to a year-on-year growth rate exceeding 20%. The evolution of international banks’ US dollar funding needs suggests that European banks have increasingly borrowed from other banks to finance their growing net long positions vis-à-vis non-banks, a situation which may have contributed to tensions in the interbank market as refinancing became more difficult, the BIS said.