According to findings from the Securities Industry and Financial Markets Association’s (SIFMA) Government Securities Research and Strategist Committee and Primary Dealers Committee, total net Treasury bill, note and bond issuance is expected to be $417.0 billion in the first quarter of 2010, higher than the net $159.5 billion in the fourth quarter of 2009, but lower than the $481.3 billion issued in the first quarter last year. The Committee is comprised of trading strategists and research analysts who specialize in the U.S. government and agency securities markets.
“The jump [in the first-quarter forecast] may partly reflect a return to net issuance levels consistent with the past year,” said Robert Toomey, managing director and associate general counsel for SIFMA’s Government and Funding Division.
He added that the projected increase in net issuance also reflects continued demand for funds to cover government spending for additional stimulus efforts. “Although the recession may be over, the economic situation remains weak, and as recently as last month the government announced plans for further job creation efforts, extension of unemployment benefits, and support for the housing market,” Toomey said.
Toomey noted that the survey is intended to provide market participants with the current consensus expectations and forecasts of many of the Primary Dealers and other firms active in the U.S. government and agency securities markets.
Other Significant Issuance Findings
- The median forecast for net new Treasury coupon security issuance is expected to be $460.0 billion for the first quarter 2010, 26.9 percent above the immediately prior quarter, and 46.3 percent above last year’s first quarter net issuance of $314.4 billion;
- The Treasury Department is projected to finish the first quarter with a cash position of $50.0 billion, 39.0 percent below the balance of $82 billion at the end of the fourth quarter (and a significant 83 percent lower than the $295 billion cash balance at the end of the third quarter 2009); and
- Net bill redemption is forecast to be $43 billion for the first quarter, compared with a net redemption of $203.0 billion in the fourth quarter and a net issuance of $166.9 billion in the first quarter of 2009.
TIPS Update
- $20 billion of Treasury Inflation-Protected Securities (TIPS) will likely be issued in the first quarter, greater than the $14.1 billion that was issued in the fourth-quarter 2009.
- The Treasury also announced the elimination of all 20-year TIPS issuances and bringing back 30-year TIPS issuance beginning February 22. The Treasury may also begin offering more frequent auctions in order to increase TIPS issuance and improve liquidity.
Yield Forecast
The Survey forecast for the 10-year Treasury yield is 3.6 percent for the first quarter of 2010 and 3.8 percent for the second quarter of this year. Regarding the 30-year Treasury, forecasts called for 4.5 percent for the first quarter and 4.8 percent for the second quarter of 2010. The 2-year Treasury note is forecast to yield 1.0 percent in the first quarter, and rise to 1.2 in the second quarter.
The survey also projects a slight flattening of the yield curve in the first quarter and for rates to rise across the board in the second quarter as measured by the 2-year and 10-year spreads. Based on median projections, the 2-year to 10-year Treasury yield spread will contract to 260 basis points in the first quarter from a high of 270 basis points at the end of fourth-quarter 2009, and remain at the 260 basis point level through the second quarter of 2010.
Risks to Forecast
Survey respondents indicated the risks to their forecasts or events that could cause interest rates to move higher or lower than forecasted. The dominant risks identified on the upside (that rates are higher than expected) are an economy that recovers more quickly than expected (may be due to additional stimulus efforts) and ensuing inflation. On the downside (lower than expected rates), risks include a weaker than expected economic rebound that may be partially due to continued high unemployment and the pull-out of government support for the housing markets, causing even worse real estate deflation.
A copy of the SIFMA Quarterly Government Securities Issuance and Rates Forecast survey can be found at http://www.sifma.org/research/pdf/Treasury-Survey1Q10.pdf.