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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 $466.0 billion in the second quarter of 2009, higher than the $51.1 billion redeemed in the first quarter and the $45.6 billion redeemed in the second quarter a year ago. The year-over-year projected increase is consistent with a higher budget deficit forecast for this fiscal year.
Survey respondents anticipate a rise in benchmark yields. The median forecast is for a 10-year Treasury yield of 2.50 percent at the end of the second quarter and 2.60 percent at the end of the third quarter of 2009. The median forecast projects the 30-year bond yield to be 3.58 percent at the end of the second quarter and 3.60 percent at the end of the third quarter. The 2-year Treasury will yield 0.78 percent at the end of the second quarter and 0.85 percent at the end of September, according to the survey.
In addition, the survey results project a slight flattening of the yield curve over the next few quarters as measured by the 2-year to 10-year Treasury yield spread.
The dominant upside risk to the forecast is that the economy rebounds faster than expected and the Fed does not adjust its Treasury purchase program accordingly. The dominant risk on the downside is if the economy dips or the Fed substantially increases the size of its purchase program. In addition, if the Fed expands its purchase program, some survey participants fear it poses a risk towards lower interest rates.
The survey forecast total gross note issuance of $88 billion in the second quarter by the four largest Federal agencies, compared to $188 billion in the first quarter of this year. Slightly more than one-third of the issuance is expected to come from the Federal Home Loan Banks, reflecting their continued importance as a source of bank liquidity during current credit market conditions. The lower agency issuance volume continues to reflect the difficult financing environment the agencies face.
The survey asked for model portfolio allocation recommendations, compared to current portfolio weighting, across the maturity spectrum of the U.S. yield curve. The consensus continued to show a slight preference for overweighting intermediate durations and neutral to underweighting for both short and long term durations.
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 the 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.
