The par value of U.S. corporate bonds affected by downgrades rose to the highest quarterly level in nearly two years in the third quarter as the U.S. subprime mortgage crisis and associated credit crunch began to take a toll on credit quality, according to Fitch Ratings.

Downgrades totaled $92.1 billion in the third quarter, or 2.6% of market volume, topping the $49.1 billion in downgrades recorded in the first half of the year. In contrast, the par value of U.S. corporate bonds affected by upgrades reached $40.2 billion, or 1.1% of market volume. Most rating changes in the third quarter involved investment grade bonds ($88.1 billion of downgrades and $34.2 billion of upgrades) rather than speculative grade issues ($3.9 billion of downgrades and $6 billion of upgrades).

New issuance volume in the third quarter of $204 billion was down 20% quarter-over-quarter.

“The uncertainty that emerged from the housing downturn seeped into the bond market and constricted deal flow,” said Eric Rosenthal, Director, Fitch Credit Market Research. “During the third quarter, speculative grade issuance was essentially dormant.”

Median coupons on newly minted bonds moved sharply higher across all rating categories, topping multiple year levels. The ‘B’ rating category demonstrated the greatest quarter jump, advancing to 10% from 7.8% in the second quarter. Spreads also surged, particularly for non-investment grade issues.

“The cost of borrowing and the availability of credit in the leveraged finance space both took a dramatic negative turn in the third quarter,” said Mariarosa Verde, Managing Director, Fitch Credit Market Research. “Clearly, the new risk averse environment will have consequences for defaults. Fitch expects the U.S high yield default rate will move substantially higher in 2008 from its very low level this year of just 0.4% through September.”

In 2008, $110.5 billion in bonds is scheduled to mature among industrial issuers. Utilities lead with $22.9 billion in bonds coming due, followed by telecommunication ($10.4 billion), food, beverage and tobacco ($8.2 billion), and automotive ($7.4 billion). In terms of financial bond maturities, $455.2 billion is scheduled to mature in 2008.

As of Sept. 30, 2007, the U.S. Corporate Bond Market totaled $3.8 trillion in outstanding par value, split 83% investment grade and 17% speculative grade. Across the pool of industrial bonds, the par value share of issues rated speculative grade is substantially higher, at 30%.

Fitch’s new report offers a macro view of par rating activity and issuance patterns for the U.S. bond market through the third quarter of 2007, as well as a look at the profile of bonds scheduled to mature through 2009 by rating and industry.