Total net Treasury bill, note and bond issuance will be higher in the fourth quarter of 2008 than in both the third quarter of 2008 and the fourth 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 $388.0 billion, higher than the $178.4 billion issued in the third quarter of 2008 and the $33.4 billion issued in the fourth quarter of 2007. The year-over-year projected increase is consistent with a higher budget deficit forecast for this fiscal year. The quarter-over-quarter projected increase in issuance volumes includes the effect of the recently passed Emergency Economic Stabilization Act (EESA) of 2008.
The committee projects a federal budget deficit of $687.5 billion for fiscal year 2009, higher than the historically high fiscal year 2008 deficit of $455.0 billion.
“The projected budget deficit increase in 2009 is due to lower revenues and increased expenditures related to the troubled economy and defense spending,” said Robert Toomey, managing director and associate general counsel at SIFMA. ”Given the projections in the forecast, survey participants show a slight preference for intermediate durations in model portfolios. The net underweight in all categories may suggest a stabilization of the credit markets for the balance of the year.”
Net new issuance of Treasury coupon securities is expected to be $129.0 billion in the fourth quarter of this year, a 14 percent decline from the $150.1 billion of net new issuance volume in the third quarter of 2008 and a greater than three-fold increase from the $41.0 billion issued in the fourth quarter of 2007. The median forecast for gross nominal coupon issuance is $228.0 billion for the fourth quarter, a decline from the $230.1 billion in the previous quarter and lower than the $157.3 billion in the fourth quarter a year ago.
Two-year Treasury notes are expected to yield 1.30 percent at the end of this year and 1.15 at the end of March 2009, suggesting that the Federal Open Market Committee is likely to cut rates further due to the current credit market stress and need to add liquidity to the market. The median forecast for a 10-year Treasury yield is 3.60 percent at the end of the year and 3.73 percent at the end of the first quarter of 2009. The 30-year bond yield is projected be 4.23 percent at the end of the year and 4.40 percent at the end of the first quarter of 2009.
Survey respondents indicated the main factors which could cause interest rates to move higher than forecast are a faster than expected economic recovery. The dominant downside risks to the forecast were identified as a further worsening of economic conditions in the financial markets resulting from deterioration in interbank lending and a continued intensifying of the credit crunch, a deep recession and possible depression, and further easing by the Fed which would push yields lower.
SIFMA's Government Forecast can be found at this link:
top://www.sifma.org/research/pdf/GovForecast1008.pdf
