The Securities Industry and Financial Markets Association forecasts that Treasury issuance will continue to rise along with government deficits.

SIFMA issued the results of its forecast survey on Friday. The survey predicts total net Treasury bill, note and bond issuance to be US$466 billion in the second quarter of 2009, higher than the US$51.1 billion redeemed in the first quarter and the US$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, it noted.

Survey respondents also anticipate a rise in benchmark yields. The median forecast is for a 10-year Treasury yield of 2.50% at the end of the second quarter and 2.60% at the end of the third quarter of 2009. The median forecast projects the 30-year bond yield to be 3.58% at the end of the second quarter and 3.60% at the end of the third quarter. The 2-year Treasury will yield 0.78% at the end of the second quarter and 0.85% 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, SIFMA said. 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 also asked for model portfolio allocation recommendations. The consensus continued to show a slight preference for overweighting intermediate durations and neutral to underweighting for both short and long term durations.

IE