The U.S. Securities Industry and Financial Markets Association reports that rising government deficits mean that total net Treasury bill, note and bond issuance will be higher in the fourth quarter of 2008 than in both the third quarter of 2008 and the fourth quarter of 2007.

A survey by SIFMA found the median net issuance forecast to be US$388 billion, higher than the US$178.4 billion issued in the third quarter of 2008 and the US$33.4 billion issued in the fourth quarter of 2007. The year-over-year projected increase is consistent with a higher budget deficit forecast for this fiscal year, the results include the effect of the financial industry bailout.

The committee projects a federal budget deficit of US$687.5 billion for fiscal year 2009, much higher than the historically high fiscal year 2008 deficit of US$455 billion. “The projected budget deficit increase in 2009 is due to lower revenues and increased expenditures related to the troubled economy and defense spending,” said Robert Toomey, managing director and associate general counsel at SIFMA.

”Given the projections in the forecast, survey participants show a slight preference for intermediate durations in model portfolios. The net underweight in all categories may suggest a stabilization of the credit markets for the balance of the year,” he added.

Net new issuance of Treasury coupon securities is expected to be US$129.0 billion in the fourth quarter of this year, a 14% decline from the US$150.1 billion of net new issuance volume in the third quarter of 2008 and a greater than three-fold increase from the US$41.0 billion issued in the fourth quarter of 2007.

Two-year Treasury notes are expected to yield 1.30% at the end of this year and 1.15% at the end of March 2009, suggesting that the Federal Open Market Committee is likely to cut rates further due to the current credit market stress and need to add liquidity to the market, it said.

The median forecast for a 10-year Treasury yield is 3.60% at the end of the year and 3.73% at the end of the first quarter of 2009. The 30-year bond yield is projected be 4.23% at the end of the year and 4.40% at the end of the first quarter of 2009.

Survey respondents indicated the main factors which could cause interest rates to move higher than forecast are a faster than expected economic recovery, SIFMA said. The dominant downside risks to the forecast were identified as a further worsening of economic conditions in the financial markets resulting from deterioration in interbank lending and a continued intensifying of the credit crunch, a deep recession and possible depression, and further easing by the Fed which would push yields lower.