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The $125 billion median forecast for net new issuance of Treasury securities is almost triple the $34 billion issued last quarter. It is also 56 percent higher than the $80 billion dollars issued during the first calendar quarter of 2007.
“We are expecting slower economic growth for much of the year as the financial system works through the housing market downturn and credit market issues,” said Michael Decker, senior managing director and head of research and public policy at SIFMA. “A slowing economy hurts the government’s fiscal position by lowering tax receipts and puts pressure on spending programs, causing a rise in borrowing,” added Decker.
The median forecast projects the 2008 budget deficit to be $228 billion, higher than the FY 2007 deficit of $162.8 billion. The increase reflects an expected positive, but below trend outlook for economic growth during the year as the U.S. economy works through the effects of the housing sector weakness and volatility in the credit markets.
The survey respondents expect Treasury yields to slowly rise during the first quarter of the year. The median projection is for the two-year Treasury note to yield 2.90 percent, the five-year note 3.30 percent, and the 10-year Treasury yield to be 3.98 percent at the end of the first quarter. The 30-year bond yield is forecast to be 4.40 by the end of first quarter. The survey indicates a slight flattening of the yield curve at the end of the first quarter before returning to the current shape by the end of the second quarter.
The survey respondents identified risks to their interest rate forecast. The dominant “upside” risk was that a faster than anticipated acceleration of the economy would lead to less than expected rate cutting by the Federal Reserve and also raise inflation concerns, which would push rates up on the longer end of the yield curve The dominant downside risk was that U.S. economic weakness would spill over to the global economy. This would lead to lower rates as a result of more aggressive rate cutting by the Fed and a decrease in demand for financial capital. The survey was conducted prior to the Fed’s January 22, 2008 announcement of a 75 basis point reduction in the target Fed funds rate to 3.50 percent.
The survey respondents also were asked to recommend duration allocations for a “model portfolio” across the Treasury yield curve maturity spectrum. The consensus of the respondents is that the panelists favor shorter and intermediate duration portfolios with 44 percent overweighting the zero to three year sector versus 33 percent under-weighing that sector. Conversely, 67 percent recommended underweighting and 11 percent recommended overweighting the 10 to 30 year duration sector.
Survey respondents believe that the U.S. Treasury Department will finish the current quarter with a cash position of $25 billion, compared to a balance of $57 billion at the end of the fourth quarter of 2007 and substantially higher than its $6 billion position a year ago.
Follow the link below to view the full survey results:
