By Claudia Hirsch
WASHINGTON (MktNews) - Even in a buyback-sensitive Treasury market, surprises in the August budget surplus projection updates might not have lasting impact on market direction, analysts said.
A steady stream of White House commentary has prepared the markets for a slimmed-down fiscal year 2001 overall surplus estimate of $160 billion to $200 billion.
This compares with estimates of $275 billion to $280 billion earlier in the year.
Sluggish economic growth and disappointing tax receipts will have contributed to this surplus contraction, according to White House economic advisor Lawrence Lindsey and budget office director Mitch Daniels.
Both the White House number crunchers and the non-partisan Congressional budget office will release their latest surplus and economic forecasts some time in August.
Jim Glassman, senior economist with JP Morgan Chase in New York, said he expects August surplus figures to be between $180 billion and $200 billion, once FY2001 tax cuts and other incidentals are accounted for. The administration's current range of $160 billion to $200 billion is "plausible," however, Glassman said.
A higher figure "would be pretty impressive" and probably good for some upward movement in Treasury prices, given that current sentiment has Treasuries "not disappearing as fast as people thought," Glassman said.
Stan Collender, budget expert with the Fleishman Hillard public relations firm in Washington, said a $10 billion surprise to the upside wouldn't be enough to goose the bond market.
But Treasury's buybacks to date have averaged $1.5 billion to $2.0 billion apiece, so an unexpected extra $10 billion means five buybacks could be salvaged, market observers have noted.
Just this past Friday, short-end yields backed up when news that Treasury's budget surplus was $32 billion countered a Friday morning estimate by Treasury Secretary Paul O'Neill of $38 billion, market players said.
The surplus' reach goes to the long end, too, where yields have remained relatively steady in the face of persistent interest rate easing, players have noted.
Federal Reserve Board Chairman Alan Greenspan last week said long rates had not fallen due to changed expectations for the surplus and long-end supply.
Marc Chandler, chief currency strategist at HSBC Bank in New York, said that though the 2/30-year Treasury yield curve has steepened some on expectations of fewer buyback expeditions, that trend may not continue in August -- even if the surplus comes in higher than expected -- if signs of an economic rebound revive inflation fears.
But any downward revision to surplus estimates in August will likely prove to be a "short-run disruption," Glassman said.
"The slowdown in revenue is a temporary detail," Glassman said, adding that he expects CBO's previous 10-year surplus forecast of $5.6 trillion to contract in the August update by roughly the amount of the new tax cut law, or about $1.35 trillion.