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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 $437.0 billion in the first quarter of 2009, higher than the ($264.7) billion issued in the fourth quarter and the $190.9 billion issued in the first quarter a year ago. The year-over-year projected increase is consistent with a higher budget deficit forecast for this fiscal year.
The survey results project a federal budget deficit of $1.45 trillion for fiscal year 2009, more than twice the record-setting fiscal year 2008 deficit of $455 billion.
Benchmark yields are expected to rise by the end of the first quarter, and remain above the current level at the end of June. The median forecast is for a 10-year Treasury yield of 2.24 percent at the end of the first quarter and 2.33 percent at the end of the second quarter of 2009. The median forecast projects the 30-year bond yield to be 2.78 percent at the end of the first quarter and 2.90 percent at the end of the second quarter. The 2-year Treasury will yield 0.78 percent at the end of the first quarter and 0.85 percent at the end of June, 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 risks to the forecast are supply pressures and dollar depreciation. Survey participants believe that the monetary and fiscal efforts will be successful in reflating the economy over the long run, leading to an eventual steepening of the curve. In addition, survey participants see risks associated with continued worsening of conditions in the financial markets and a lessening of demand for Treasury securities.
The survey asked panelists for their recommendations for model portfolio allocations, compared to the current portfolio weighting, across the maturity spectrum of the U.S. Treasury yield curve. The Committee consensus shows a slight preference for overweighting intermediate durations. The net overweighting in all categories may suggest a stabilization of the credit markets for the balance of the year.
Approximately 40 percent of the survey respondents favored an overweight position in the 0- to 3-year sector, while 40 percent recommend being neutral and 20 percent underweight. For the intermediate duration, the 3- to 7-year sector, 60 percent recommended overweighting with the remaining 40 percent recommending neutral. In the 7- to 10-year sector, 40 percent recommend overweighting, with 40 percent recommending neutral. In contrast to the short-duration sector, 20 percent recommended underweighting and the balance recommending neutral and over.
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.
