Lower U.S. Treasury Issuance Based on Reduced Budget Deficit Forecast.
Interest rates will decline and the yield curve will remain flat over the next two quarters, according to the median response to a quarterly survey issued by the Securities Industry and Financial Markets Association’s (SIFMA) Government Securities Research , Analysis and Strategy Committee, which includes the leading strategists and research analysts at SIFMA member firms who represent the majority of primary dealers of U.S. Treasury securities. The survey forecasts that the yield on the 10-year Treasury note, which was 4.65 percent at the time of the survey, will fall to 4.63 percent at the end of the second quarter and fall further to 4.60 percent by the end of the third quarter.
“The survey respondents expect benchmark yields to decline. Lower projected short rates suggest the possibility of a Fed rate cut at some point during the next two quarters, although the decision, as the FOMC has clearly communicated, is data dependent,” said Michael Decker, head of research and public policy at SIFMA. “The markets have absorbed the volatility challenges earlier in the year, and we seem to be on track for continued economic growth.”
Survey respondents indicated the dominant upside risk that could affect the direction of rates is higher than expected inflation, or, alternatively, the inflation rate not moderating as much or as quickly as expected, leading to a delay in a rate cut or more aggressive action by the Federal Reserve. Stronger than expected economic growth, which would drive up real rates, was an additional upside risk mentioned by the panelists. Conversely, the dominant downside risk to the forecast was a sharper and continuing housing correction, which would have spillover effects into other sectors and possibly result in the Fed easing monetary policy.
The median survey response forecasts net total Treasury bill, note and bond issuance to be -$111.4 billion in the second quarter of 2007, lower than the first quarter, reflecting reduced government financing needs as tax receipts peak in mid-April. The committee projects a federal budget deficit for fiscal year 2007 of $191 billion, a 23% decline from fiscal year 2006, indicating continued strength in tax revenue growth.
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The Securities Industry and Financial Markets Association brings together the shared interests of more than 650 securities firms, banks and asset managers. SIFMA's mission is 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. SIFMA works to represent its members’ interests locally and globally. It has offices in New York , Washington D.C., and London and its associated firm, the Asia Securities Industry and Financial Markets Association, is based in Hong Kong .
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