NEW YORK, Jan 24 (Reuters) - Interest rates will decline and the Treasury bond yield curve will remain flat, according to a survey of U.S. primary government securities dealers.
A Fed rate cut is also possible in the first quarter of 2007, according to a quarterly survey conducted by a Securities Industry and Financial Markets Association committee comprised of leading strategists and research analysts at association member firms.
The survey predicted the yield on the 10-year Treasury note will reach 4.63 percent by the end of the first quarter of 2007 and remain there until the end of June, while the two-year Treasury yield is expected to be 4.70 percent by the end of the first quarter and 4.60 percent by midyear.
"In addition to slightly lower rates, the yield curve will likely remain inverted to flat through the first half of 2007," said Michael Decker, co-head of research at SIFMA.
"While a rate cut by the Fed sometime in the first quarter is possible, it will depend on whether questions about slowing economic growth replace the threat of higher inflation as the dominant concern about the economy," Decker said.
NET NEW ISSUANCE TO REACH $143 BILLION IN FIRST QUARTER
The survey also predicted net new issuance of U.S. Treasury coupon securities and bills will reach $143 billion in the first quarter compared with $158 billion during the same period last year.
The decline in issuance from last year reflected a smaller budget deficit forecast as a result of continued tax revenue growth, the survey said
The committee's median projection forecasted a $225 billion federal budget deficit for fiscal year 2007, lower than the actual $248 billion deficit in fiscal year 2006.
"The deficit narrowed in 2006 because sustained economic growth and robust corporate profits led to a significant rise in tax revenues," Decker said.
"Although the economy is expected to moderate in 2007, tax receipts are still expected to maintain a healthy pace, leading to a smaller 2007 deficit," he said.
SLIGHTLY INVERTED TO FLAT YIELD CURVE SEEN
The committee also forecasted a slightly inverted to flat yield curve through the first half of 2007.
The median survey response called for the spread between 10-year and two-year Treasuries to be inverted by seven basis points at the end of the first quarter before settling at a 3-basis-point spread by the end of June.
Asked about risks to the interest rate forecast, committee members said rates could move higher than expected if an accelerated rate of inflation led to more aggressive action by the Fed. Conversely, the Fed could ease monetary policy if a protracted housing correction spilled over into other sectors and resulted in substantial economic deceleration that lowered bond yields.
Survey respondents expected the U.S. Treasury to issue $19 billion in Treasury Inflation-Protected Securities, or TIPS, in the first quarter, which is roughly the same total as last quarter but slightly lower than the $21 billion issued during the first quarter of 2006.
The Securities Industry and Financial Markets Association represents more than 650 securities firms, banks and asset managers to promote policies and practices that work to expand and perfect markets, foster the development of new products and services and create efficiencies for member firms, while preserving and enhancing the public's trust and confidence in the markets and the industry.
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