A survey conducted by the Securities Industry and Financial Markets Association finds that total net U.S. Treasury bill, note and bond issuance is expected to be US$62 billion in the fourth quarter of this year, higher than last quarter and the fourth quarter a year ago.

It says that 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 US$22 billion for this quarter compared to US$23.2 billion in the third quarter of 2007 and US$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 US$30 billion, compared to a balance of US$75.2 billion at the end of the third quarter of 2007.

The federal budget deficit for fiscal year 2008 is projected to be US$200 billion, higher than the 2007 deficit of US$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. The median projection is for the 10-year Treasury yield to be 4.6% 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 4.0% at the end of the fourth quarter, and the 30-year bond yield is expected to be 4.85% at the end of the fourth quarter and 4.8% 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,” said Steve Davidson, vice president, capital markets research at SIFMA. “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.”

When asked to assess risks that could cause interest rates to move higher or lower, survey respondents felt the dominant risks on the upside were the pace of economic growth re-accelerating faster than expected and the rate of inflation increasing as a result of a faster growing economy. The dominant down-side risk is a sharper and longer than expected housing sector deterioration spilling over into other sectors, resulting in substantial economic deceleration and lower demand on resources and thus bond yields, according to survey respondents.