UPDATE 1-Surging US deficit to lift bond issuance-survey

(Recasts, adds details, SIFMA quote)

By Burton Frierson

NEW YORK, April 23 (Reuters) - U.S. government bond issuance will rise this quarter, according to an industry survey released on Wednesday, as the 2008 federal budget deficit widens sharply amid an economic slowdown.

Net new issuance of Treasury coupon securities is expected to be $47.0 billion in the second quarter, according to the survey by the Securities Industry and Financial Markets Association (SIFMA).

That would mark a rise from $36.5 billion in the first quarter of 2008 and $25.4 billion in the second quarter of 2007, the industry group said in a statement.

The survey of primary dealers projected an increase in the federal budget deficit this fiscal year to $413 billion from 2007's $168 billion.

"The year-over-year projected issuance increase is the result of the higher budget deficit forecast for fiscal year 2008, reflecting a slower economic growth outlook due to the continued impact of weakness in the housing sector and current conditions in the credit markets," said Steve Davidson, the association's managing director.

"Taking into account the market environment, the committee continues to favor a short-duration portfolio, Davidson said," referring to the SIFMA committee that issued the survey. "The survey results also suggest a view that market conditions may ease later in the year."

According to median forecasts of Treasury yields, the market also expects a steeper yield curve.

Traditionally, this helps boost the economy by making it more profitable for banks to borrow in short maturities and then lend for longer terms to businesses and consumers.

According to the survey, the median forecast was for a 10-year Treasury note US10YT=RR yield of 3.55 percent at the end of the second quarter and 3.90 percent at the end of the third.

The survey predicted two-year yields US2YT=RR of 1.45 percent at the end of the second quarter and 1.55 percent at the end of the third.

Based on the forecasts, the rate differential on the 2/10-year segment of the yield curve would be 210 basis points at the end of the second quarter, steeper than the current 155 basis points.

Two-year notes were trading flat on Wednesday, yielding 2.21 percent. Benchmark 10-year notes were down 15/32, for a yield of 3.76 percent.

According to the survey, the net paydown of Treasury bills is projected at $47.5 billion in the current quarter, compared with $45.5 billion net issuance in the first quarter of 2008 and a $258.0 billion paydown in the second quarter of 2007. (Additional reporting by Richard Leong; Editing by Jonathan Oatis)