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Total net Treasury bill, note and bond issuance will be higher in the second quarter of 2008 than in the second quarter of 2007 due to a larger budget deficit projection, according to a quarterly survey issued by the Securities Industry and Financial Markets Association’s (SIFMA) Government Securities Research, Analysis and Strategy Committee, which includes leading strategists and research analysts at SIFMA member firms who represent the majority of primary dealers of U.S. Treasury securities.
The median survey response forecast net issuance to be -$500 million, indicating a net paydown of debt. This is a decline from net issuance of $82.0 billion in the first quarter of 2008 but an increase from second quarter 2007’s net issuance of -$232.7 billion. The committee projects a federal budget deficit of $413 billion for fiscal year 2008, a significant increase over the fiscal year 2007 deficit of $168 billion, which was the smallest deficit in five years.
“The year-over-year projected issuance increase is the result of the higher budget deficit forecast for fiscal year 2008, reflecting a slower economic growth outlook due to the continued impact of weakness in the housing sector and current conditions in the credit markets,” said Steve Davidson, SIFMA managing director. ”Taking into account the market environment, the committee continues to favor a short duration portfolio. The survey results also suggest a view that market conditions may ease later in the year.”
Net new issuance of Treasury coupon securities is expected to be $47.0 billion in the second quarter of this year, compared to $36.5 billion in the first quarter of 2008 and $25.4 billion in the second quarter of 2007. Net paydown of Treasury bills is projected at $47.5 billion in the current quarter, compared to $45.5 billion net issuance in the first quarter of 2008 and a $258.0 billion paydown in the second quarter of 2007.
Interest rates on two-year Treasury notes are expected to decline while rates on 10-year Treasury coupons rise slightly over the next two quarters, according to the survey. The median forecast is for a 10-year Treasury yield of 3.55 percent at the end of the second quarter and 3.90 percent at the end of the third quarter. The median forecast projects the 30-year bond yield to be 4.5 percent at both the end of the second quarter and the end of the third quarter, while the 2-year Treasury note is expected to yield 1.45 percent at the end of the second quarter and rise to 1.55 percent at the end of the third quarter.
Survey respondents indicated the main factors which could cause interest rates to move higher than forecast are credit market stability and improved financial conditions which would boost economic growth, rising inflation and inflationary expectations and further depreciation of the dollar. These factors would likely result in less rate-cutting by the Federal Reserve. Conversely, the dominant downside risks to the forecast are greater than expected recessionary pressures spilling over to the broader global economy, a sharper credit crunch and event risk in the financial markets. The expected result would be a lower demand on resources and thus bond yields would generate an additional response from the Federal Reserve.
