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 $446.0 billion in the third quarter of 2009, compared with the net $343 billion issued in the second quarter and the net $527 billion issued in the third quarter a year ago. The quarterly projected increase is consistent with significant third quarter borrowing needs, while last year’s large issuance occurred as the deficit increased with the intensification of the credit crisis.
Survey respondents anticipate the benchmark Treasury yield movement to be mixed. The median forecast is for a 10-year Treasury yield of 3.70 percent at the end of the third quarter and 3.90 percent at the end of the fourth quarter of 2009. The median forecast projects the 30-year bond yield to be 4.50 percent at the end of the third quarter and 4.63 percent at the end of the fourth quarter. The 2-year Treasury was forecast to yield 1.05 percent at the end of the third quarter and 1.23 percent at the end of December, according to the survey.
In addition, the survey results project a slight steepening of the yield curve over the next few quarters as measured by the 2-year to 10-year Treasury yield spread.
The upside risks survey respondents gave to the forecast are the stalling of Fed purchases, a faster than expected economic recovery, and declining demand for Treasuries. Another upside risk is additional fiscal stimulus, which would also increase the budget deficit. The two most dominant risks identified on the downside are continued real estate price declines, which would impair asset values, and the economy slipping back into further declines as fiscal stimulus fails to catalyze private sector investment and consumption.
The survey forecast total gross note issuance of $333 billion in the third quarter by the four largest Federal agencies, compared to $120 billion in the second quarter of this year. Nearly 40 percent 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 survey asked for model portfolio allocation recommendations, compared to current portfolio weighting, across the maturity spectrum of the U.S. yield curve. The consensus showed a slight preference for underweighting intermediate durations, neutral-to-overweighting for short term and under-to-a-strong underweighting of the 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.