Total net Treasury bill, note and bond issuance is expected to be $62 billion in the fourth quarter of this year, higher than both the last quarter and the fourth quarter a year ago, according to the median responses to a survey conducted by the Securities Industry and Financial Markets Association (SIFMA).
The year-over-year projected increase is consistent with a somewhat higher budget deficit forecast for this fiscal year, following an extended period of lower deficits as a result of substantial tax revenue growth. Gross Treasury issuance is projected to be lower than last quarter, affected by refundings of maturing and callable debt as well as Treasury’s new cash needs.
The median forecast for net new issuance of Treasury coupon securities is $22 billion for this quarter compared to $23.2 billion in the third quarter of 2007 and $9.3 billion in the fourth quarter a year ago. This represents a doubling of issuance volume compared to a year ago.
Survey respondents believe the Treasury department will finish the quarter with a cash position of $30 billion, compared to a balance of $75.2 billion at the end of the third quarter of 2007.
The federal budget deficit for fiscal year FY 08 is projected to be $200 billion, higher than the FY 07 deficit of $162.8 billion. This median projection takes into account anticipated changes in spending and tax policy that affect near-term budget projections at the time of the survey.
The survey respondents expect Treasury yields to decline slightly over the next couple of quarters, compared to the yields during the survey period, which was the week following the announcement of monthly employment data on 5 October. At the end of the survey period, the 2-year note yield was 4.13% and 10-year yield was 4.69%. As of October 22, the 2-year note was yielding 3.86% and the 10-year 4.41%.
The median projection is for the 10-year Treasury yield to be 4.60% at the end of the fourth quarter and end the first quarter of next year at the same level. The 2-year note Treasury is expected to yield 4.00% at the end of the fourth quarter, The 30-year bond yield is expected to be 4.85% at the end of the fourth quarter and 4.80% at the end of the first quarter of next year.
The shape of the yield curve is not expected to change dramatically over the next few quarters, steepening slightly during the fourth quarter of the year and then flattening in the first quarter of next year.
“Despite the housing downturn, economic growth is continuing albeit at a below-trend level. The survey’s interest rate forecast and model portfolio recommendations reflect a market view of responsive and credible Fed policy, as well as a return to more stable credit market conditions,” says Steve Davidson, vice president, capital markets research at SIFMA.