published: 7.10.03

The Bond Market Association Projects a 19% Increase in Issuance of Treasury Notes in Current Quarter - Total Issuance to Reach $89 Billion

Date: July 10, 2003
Contact: Jon Teall, 646.637.9279 or Emily Brunner 646.637.9268

New York, NY - July 10, 2003 - The Bond Market Association today released its quarterly survey of primary US Treasury dealers, who collectively predict another rise in U.S. Treasury debt sales. The median forecast is that net new Treasury note issuance will reach $89 billion in the current quarter. If issuance reaches that level, it would be a 19 percent increase over the second quarter of 2003 and 134 percent increase over the third quarter of 2002. The median response of the dealers responding to the Association's Quarterly Government Securities Issuance Rates Forecast also projected a federal budget deficit for fiscal year 2003 of $400 billion, a 153 percent increase over the fiscal year 2002 deficit of $158 billion.

"The Committee's forecast of the federal budget deficit and the size of the next Treasury auction reflects anticipated changes in spending and tax policy," said Michael Decker, senior vice president and research and policy director at the Association. "That includes, of course, the effect of the recently enacted Jobs and Growth Tax Relief and Reconciliation Act."

Regarding the near-term outlook for benchmark interest rates, the median response to the survey calls for Treasury yields to rise, and the yield curve to flatten modestly over the second half of the year. Responding before the Federal Reserve's Open Markets Committee meeting in late June, the median expectation of survey respondents was for 10-year bonds to yield 3.50% by the end of the year. Instead, that level was reached at the Fed's meeting in June. As for the yield curve, respondents expect a 205 basis point spread between 2-year and 10-year Treasury securities by the end of September and 207 basis point spread by the end of the year.

"Both of these trends are consistent with modest economic growth and expanding net issuance," noted Mr. Decker.

The Association's forecast is issued on a quarterly basis and reflects the results of a survey of members of the Government Securities Research Committee, comprised of trading strategists and research analysts with a focus on the U.S. government and agency securities markets.

In terms of model portfolio allocations across the maturity spectrum of the U.S. Treasury yield curve, the Committee's consensus view was that investors should move towards a stronger weighting in longer duration U.S. Treasuries, especially those with maturities over seven years. For short-dated Treasuries with maturities of three years or less, the Committee was split, with a slight bias towards underweighting securities in this category. These responses are generally consistent with an expectation of some flattening of the Treasury yield curve. Under such a scenario, long term Treasury securities would be expected to outperform shorter term Treasuries.

The Committee also projects that coupon issuance will total $164 billion in the current quarter, 15 percent higher than the total for the second quarter of 2003, but 15 percent lower than the third quarter of 2002.

According to the Forecast, the Treasury Department will finish the quarter with a cash balance of $45 billion, compared to a balance of $49 billion at the end of the second quarter.

Gross note issuance by the four largest Federal Agencies is expected to total $280 billion in the third quarter. In recent years, callable debt and other products with option-like characteristics have been an increasingly prominent role in the funding strategy at the Federal Agencies. That trend has continued year-to-date. Consequently, gross issuance by the agencies has become more sensitive to changes in interest rates.

The members of The Bond Market Association's Government Securities Research Committee consists of individuals ABN AMRO Bank, Barclays Capital Inc., Bear, Stearns & Co. Inc., CitiGroup Global Markets Inc., Credit Suisse First Boston LLC., Deutsche Bank Securities Inc., First Tennessee Capital Markets, Goldman, Sachs & Co., HSBC Securities (USA) Inc., J.P. Morgan Securities, Inc., Lehman Brothers Inc., Merrill Lynch Government Securities Inc., Mizuho Securities USA Inc., Morgan Stanley & Co. Incorporated, Nomura Securities International, Inc., RBS Greenwich Capital, UBS Warburg LLC.

The Bond Market Association, with offices in New York, Washington, D.C. and Europe (London), represents securities firms and banks that underwrite, trade and sell debt securities in the U.S. and globally.

Notes to Editor:

On Interest Rate Results:

• During the survey period and just prior to the FOMC meeting on June 24-25, the ten-year Treasury note yielded 3.25 percent. Subsequent to the FOMC meeting, the yield rose some 26 basis points to 3.51 percent as of the end of the second quarter, June 30. The median forecast is for the ten-year Treasury yield to be 3.30 percent by the end of September and 3.50 percent by the end of the year.
• The two-year yield during the survey period, just prior to the FOMC meeting, was 1.10 percent. (At the end of the second quarter, June 30, subsequent to the FOMC announcement, the yield had reached 1.28 percent). The median forecast for the two-year Treasury yield is for a 1.25 percent yield by the end of September and 1.43 percent by the end of the year.