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The Securities Industry and Financial Markets Association (SIFMA) today issued the results of its Quarterly Government Securities Issuance and Rates Forecast. The median survey response forecast total net Treasury bill, note and bond issuance to be $351.0 billion in the second quarter of 2010, compared with the net $483.2 billion issued in the first quarter of 2010 and the net $343.2 billion issued in the second quarter a year ago. The quarterly projected decrease may partly reflect an expanding economy and expectations for sustainable growth and attempts to curb spending and the national debt going forward. However, issuance projections remain largely in line with year-ago levels, indicating a continued need for Treasury debt.
Survey respondents anticipate that benchmark Treasury yields will increase going through the second quarter of 2010, reflecting a growing confidence in the economy’ s recovery and perceived decrease in upcoming demand for relatively safe-haven Treasury debt.
The median forecast projects the 30-year bond yield to be 4.9 percent at the end of both the second and third quarters this year. The 2-year Treasury was forecast to yield 1.2 percent in the second quarter and 1.3 percent in the third quarter of 2010. In addition, the survey projects the 2-year to 10-year Treasury yield spread will be the same for both the second and third quarters of 2010, at 280 basis points, with both the 2-year and 10-year separate yields rising in corresponding increments of 0.2% yield through the second quarter and another 0.1% yield through the third quarter.
The upside risks survey respondents gave to the forecast are a greater than expected economic recovery, continued record-low rates, and subsequent inflationary pressures. The dominant downside risks to the forecast are the chance for a double-dip recession, deflation and additional sovereign risk problems stemming from the Greek crisis.
The survey forecast total gross coupon issuance by the four largest Federal agencies of $294.3 billion in the second quarter, compared to $307.4 billion in the first quarter of this year. Approximately 42 percent of the issuance volume is expected to come from the Federal Home Loan Banks, reflecting their increasing importance as a key provider of low-cost funding to communities, especially those of lower economic development.
The survey asked for model portfolio allocation recommendations, compared to current portfolio weighting, across the maturity spectrum of the U.S. yield curve. The results generally favor a neutral to underweight recommendation, but a quarter of responses were also overweight for the very short-term and very long-term maturities.
The forecast reflects the responses to a survey of members of the Association’s Government Securities Research, Analysis and Strategy Committee. The committee is composed of trading strategists and research analysts at Association member firms who specialize in U.S. government and agency securities markets. The survey is intended to provide market participants with the current consensus expectations and median forecasts of many of the Primary Dealers and other firms active in the U.S. government and agency securities markets.
