The Bank for International Settlements (BIS) published its Quarterly Review today, reporting strong growth in debt issuance and derivatives trading.

It reports that issuance of bonds and notes in international debt securities markets increased by 24% on a gross basis in the first quarter of 2006, to around US$1.2 trillion, and by 9% on a net basis, to US$622 billion. “These levels represented historical peaks, suggesting ready access for borrowers to international credit markets and favourable financing conditions,” it says. U.S.-based borrowers are leading the way.

Last year’s record-breaking issuance of international bonds and notes by emerging market borrowers was followed by continued robust activity in the first quarter of 2006, as borrowers took advantage of persistently narrowing spreads, the BIS added. “Gross emerging market borrowing rose by 19% compared to the last quarter of 2005, reaching a new high of just below US$60 billion, while net borrowing jumped by 33% to US$42 billion – also a record level. While improving fundamentals have underpinned this strength for some time, the recent brisk pace seems also to have been fuelled to some extent by the search for yield among international investors,” it observes.

The pace of trading on the international derivatives exchanges also quickened in the first quarter of 2006, the BIS reported. Derivatives turnover measured in notional amounts of interest rate, equity index and currency contracts increased by 25% to US$429 trillion between January and March 2006. The growth in turnover was particularly strong in interest rate products, as changing perceptions about the future course of monetary policy in the United States and Japan lifted activity in money market contracts in the U.S. dollar and yen, the BIS says.

Due to valuation effects from higher equity prices, turnover in derivatives on stock indices reached a record US$43 trillion in the first quarter, up 11% from the previous three months, it notes. “Volume increased sharply in derivatives on energy and non-precious metals, and was stable at a high level in contracts on precious metals,” it adds.

Growth in the market for credit default swaps also remained strong in the second half of 2005, it says. The notional amount of CDSs outstanding increased by one third between end-June and end-December 2005 to US$14 trillion. “The rapid growth in these instruments has exposed several weaknesses in the market, such as occasional shortages of deliverable debt and backlogs in trade confirmations, though progress is being made in addressing these issues,” it says.