Interest Rate Strategy
2010 USD-Denominated Fixed
Income Issuance Outlook
In this report, we aim to provide a fundamental analysis of the issuance outlook across all of the
major asset classes that issue dollar-denominated debt, including:
1. US Treasury Debt
2. Agency MBS
3. Agency Debt
4. Municipal Debt
5. US/EU Supra and Agency Debt
6. IG Corporate Debt
7. HY Corporate Debt
8. ABS
9. Emerging Market Debt
Issuance picks up in 2010: While total net issuance across the above fixed income products
actually fell by ~$300 billion to $1.75 trillion in 2009,we expect this to rebound to $2.22 trillion in 2010.This represents a 27%YoY increase, and willsurpass the previous high of $2.16 trillion hit in 2007.2009 − QE tailwind kept yields low: When we account for the $1.6 trillion bought via the Fed’s QE,we find that investors have had to absorb only $200 billion of net issuance in 2009, which further helps explain why Treasury yields along with those of other asset classes remained relatively low and stable.2010 − Higher supply/higher yields: In 2010,however, we expect issuance net of QE to rise from $200 billion to $2.06 trillion, an eleven-fold increase.
Investors will have to grapple with this shock in supply, and it remains one of the fundamental
drivers behind our call for 4.50% on the 10Y US Treasury by late 1Q/early 2Q and 325bp on the
2s10s Treasury curve (see Asymmetric Risks Point to Higher Yields, Steeper Curve on December 10).Trades: For a list of trade ideas, please consult ourrecent publications, including our 2010 outlooks.
美国国债部分
We expect gross coupon Treasury issuance of $2.6 trillion in F2010 (fiscal year began on October 1st, 2009) – Exhibit 1.This is a massive increase of roughly $700 billion or nearly 40% from the year before, and follows on the back of a $1.1 trillion increase in 2009 from the year before. Gross issuance is not set to decline until F2011, and even then, a 25% decline to $1.9 trillion will still keep it above F2009 levels.
Net of maturities, F2010 coupon supply will also hit a record $1.8 trillion, a 45% increase from the $1.3 trillion issued in F2009 (see Exhibit 1). This is even a larger supply increase than on a gross basis above. In 2011, gross issuance should begin to decline as maturities continue to pick up, causing net supply to drop by 40% to $1.1 trillion, a larger decrease than in gross terms. 2010 thus represents the biggest headwind from both a gross and net issuance perspective.
Average maturity of issuance shifting higher: We expect that the average maturity of new issuance to increase from 6 years in 2009 to 6.7 years in 2010 and 8.2 years in 2011 (see Exhibit 2). In 2010, this will increase the average maturity of outstanding Treasury debt from the current 4½ years to 5,which has been the historical average since 1980 (see Exhibit2). These expectations are based on the guidance provided by the Treasury at its November 2009 refunding, when the Treasury stated that it intends to focus on increasing the average maturity of its debt after heavily relying on the T-bill sector in 2H08 (and hitting the lowest average maturity of its debt since the early 1980s at the end of 2008). By extending
the average maturity, the Treasury will also rebuild the buffer In addition, the Treasury has stated that it intends to stabilize the average maturity at a new level of 6-7 years sometime by 2015, which is above its historical average maturity of 5 years.
Higher reliance on coupon securities: Given the above intentions, 2010 will see the Treasury decrease its reliance on T-bills and increase its reliance on coupon securities. At the end of 2009, T-bills accounted for 26% of the $7.2 trillion Treasury debt market. Our economist, David Greenlaw, estimates T-bills to decrease to 15% by the end of 2010 (and to only 12% by 2011). This will raise the reliance on coupon securities to 85% by 2010 and 88% by 2011.
…and shifting to longer-dated coupons too: Within notes and bonds, the Treasury announced that it will continue to gradually increase the size of coupon issuance through mid-2010. We also believe that the Treasury will increasingly rely on longer-maturity securities than say 2y or 3y notes, again in order to help attain its maturity targets (e.g., 5-year average maturity by end-2010). In fact, this is one of the reasons for the Treasury’s decision to replace the issuance of 20y TIPS with 30y TIPS, effectiveimmediately.
Debt ceiling wildcard: As of December 15, the combined public debt burden stood at $12.08 trillion, with just $88 billion to go to reach the $12.1 billion debt ceiling. Given the Treasury’s issuance pattern, this ceiling should be hit in late Dec-09/early Jan-10. While we believe that Congress will ultimately have to increase this ceiling to allow the federal government to fund itself through 2010, the possibility of a
disruption to the Treasury’s regular auctions remains. This is an added wildcard that we will watch into year-end.
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