Total net Treasury bill, note and bond issuance is expected to rise to $119.5 billion during the third quarter of this year, higher than last quarter and a year ago due to a larger projected FY 2008 federal budget deficit, according to a quarterly survey issued by Securities Industry and Financial Markets Association (SIFMA) Government Securities Research, Analysis and Strategy Committee. The committee comprises leading strategists and research analysts at SIFMA member firms representing the majority of U.S. Treasury securities primary dealers.
The $82.5 billion median forecast for net new issuance of Treasury coupon securities represents a more than 50 percent rise in last quarter’s $53.3 billion in net new issuance. It is also a greater-than-threefold increase from the $23.2 billion net new coupons in the third quarter a year ago. However, this quarter’s forecast for gross combined nominal coupon and Treasury Inflation-Protected-Securities (TIPS) projects a decrease from $232.8 billion to $200 billion due to expected refunding of maturing and callable debt, and Treasury’s new cash needs.
“Slower economic growth has begun to moderate tax receipts, which puts pressure on the government’s fiscal position and on spending programs, causing a rise in the deficit and increased borrowing,” according to Rob Toomey, managing director and staff advisor to the government securities, research, analysis and strategy committee.
The median forecast projects the 2008 budget deficit to be $425 billion which is significantly higher than the FY 2007 deficit of $168 billion. And fiscal year-to-date combined corporate and individual income tax receipts are running about three percent below last year’s same-period levels, with corporate tax receipts 15 percent lower and individual tax receipts 0.5 percent higher.
The survey respondents expect Treasury yields to continue to rise above the current historically-low levels. The median projection is for the two-year Treasury note to yield 2.78 percent at the end of the third quarter and 2.63 percent at the end of fourth quarter. Interest rates on the 10-year Treasury are projected to be 4.18 percent by the end of third quarter and 4.05 percent at the end of fourth quarter. Expectations for the yield on the 30-year are 4.80 percent Q3 08 and 4.68 percent by the end of Q4 08. In addition, the survey results project a slight steepening of the yield curve over the next two quarters as measured by the 2-year to 10-year Treasury yield spread.
The survey respondents identified risks to their interest rate forecast. Respondents indicated that the dominant “upside” risks were rising inflation and inflationary expectations, followed by further depreciation of the dollar, a combination that would result in tighter monetary policy. Conversely, the dominant downside risks that were identified were a further credit contraction leading to greater than expected recessionary pressures spilling over to the broader global economy, followed by event risk and lower than expected inflation.
When survey respondents were asked to recommend allocations for a “model portfolio” across the Treasury yield curve maturity spectrum, committee consensus showed a slight preference for intermediate durations with approximately 29 percent favoring an overweight position in the 0- to 3-year sector, as well as the 10- to 30-year maturity category. Respondents overweighed all categories, which may indicate a preference for the Treasury asset class and a “flight to quality” in the current uncertain credit market environment.