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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 $399.0 billion in the third quarter of 2010, compared with the net $343.6 billion issued in the second quarter of 2010 and the net $392.5 billion issued in the third quarter a year ago. The quarterly projected increase may reflect increasing worries regarding stagnant unemployment, a cooling economic recovery, deflationary pressures and the potential need for additional stimulatory measures by the U.S.
Survey respondents anticipate that benchmark Treasury yields will increase going through the third and fourth quarters of 2010, but this increase is from lower baseline yield levels during the second quarter. The lower baseline is due to a combination of international sovereign debt worries, deterioration in some housing markets, and continuing high unemployment rates that contributed to driving the demand for relatively safe-haven Treasury debt.
The median forecast projects the 30-year bond yield to be 4.2 percent at the end of the third quarter and 4.4 percent at the end of the fourth quarter 2010. The 2-year Treasury note was forecast to yield 0.7 percent in the third quarter and 0.9 percent in the fourth quarter of 2010. In addition, the survey projects the 2-year to 10-year Treasury yield spread will steepen in the third quarter of 2010, at 260 basis points, with the 10-year yield expected to rise more quickly than the 2-year yield. The upside risks survey respondents gave to the forecast include strong growth with markets not digesting supply, a greater than expected economic recovery, increased concerns about the budget deficit, and upside risks stemming from improvement in inflation data. The dominant downside risks to the forecast are the chance for a double-dip recession, economic problems in Europe, and lower than expected economic growth.
The survey forecast total gross coupon issuance by the four largest Federal agencies of $327 billion in the third quarter, compared to $232.1 billion in the second quarter of 2010. Approximately 40 percent of the issuance volume is expected to come from the Federal Home Loan Banks, while 25.1 percent from Fannie Mae, 27.5 percent from Freddie Mac, and the remaining 7 percent from the Farm Credit System Banks.
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 recommendation across all maturities, with the remaining responses almost equally divided between over- or under-weight.
The forecast reflects the responses to a survey of members of the Association’s Government Securities Research and Strategist 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.
A copy of the survey can be found at the following link: www.sifma.org/uploadedFiles/Research/OutlooksForecasts/Outlook_USGovernmentForecast_201007_SIFMA.pdf
