Reuters: Financial Services and Real Estate: MONEY MARKETS-Dollar rates slip as cash chases less supply

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MONEY MARKETS-Dollar rates slip as cash chases less supply Jun 7th 2012, 19:28 Thu Jun 7, 2012 3:28pm EDT * U.S. repo rates fall third straight day * Companies issued fewer dollar commercial paper * Huge amount of TLGP debt seen maturing in June * Operation Twist offsets less CP, TLGP paper By Richard Leong NEW YORK, June 7 (Reuters) - Investors charged banks and Wall Street less to borrow dollars on Thursday as they had fewer options to reinvest their cash on less supply of short-term corporate and government securities. Hopes of more monetary easing from the U.S. Federal Reserve and the European Central Bank also exerted downward pressure on key interest rates on dollars in the interbank market, analysts and investors said. "There is a lot of liquidity in the front end of the market," said Deborah Cunningham, chief investment officer of money markets at Federated Investors in Pittsburgh, which manages $364 billion. This huge pile of cash in the global bank system stemmed from the ultra loose policies of the Fed and the ECB. The ECB flooded euro zone banks with more than 1 trillion in cheap loans in two separate operations in December and February. On Thursday, Fed Chairman Ben Bernanke told a Congressional panel that the Fed was ready to embark on more actions if the economy needs help but he offered few hints that more monetary stimulus was imminent. The overnight rate on tri-party repurchase agreements in which banks and bond dealers pledge U.S. government debt as collateral in exchange for cash was last quoted at 0.19 percent, compared with 0.21 percent late on Wednesday, traders said. The overnight repo rate fell for a third straight day in this $1.6 trillion market. The federal funds rate averaged 0.16 percent on Wednesday, down from 0.17 percent on Tuesday, according to New York Federal Reserve data released on Thursday. Still persistent contagion fears from Greece's possible exit from the euro zone and Spain's bank troubles have left many investors clinging to their cash rather than lending it or parking it in higher-yielding albeit riskier investments. "The European issue is profound. That's a long-term problem for it solve," said Dave Sylvester, head of money markets at Wells Capital Management in Minneapolis, which has more than $325 billion in assets under management. Risk aversion hit fever-pitch last week. A stampede into the government debt of the United States, Germany, Switzerland, Japan and other perceived safehaven countries drove their borrowing costs to historic lows. These record low interest rates might have whetted the appetite of some companies to issue longer-term debt to lock in these rates and replace commercial paper and other short-term debt, analysts and investors. Federated's Cunningham said Canadian and Australian banks raised their issuance of medium-term notes and longer-dated dollar-denominated certificates of deposits last week. Investors snapped up these higher-yielding investments from these banks which are seen as safer than those in the euro zone, analysts said. For example, one-year Canadian and Australian bank debt offered interest rates in a 0.75 to 0.80 percent range, compared with 0.25 percent on their one-month paper. LESS SHORT-TERM DEBT SUPPLY Last week's increase in longer-dated paper coincided with a decline in commercial paper issued by foreign banks. Foreign banks' commercial paper outstanding fell $5.8 billion to $130.9 billion in the week ended June 6. This was the lowest level in a month, according to Fed data released on Thursday. Overall U.S. commercial paper supply fell $19.6 billion to $998.7 billion in the latest week, its lowest level in five months, the latest Fed data showed. In addition to less private debt, about $62 billion of securities backed by the Federal Deposit Insurance Corp. are scheduled to mature in June. Analysts reckon proceeds from maturing Temporary Liquidity Guarantee Program (TLGP) debt will likely flow into the interbank dollar market and lower borrowing costs for banks and Wall Street. This FDIC program was created in late 2008 during the global financial crisis with the goal of raising insurance coverage for bank accounts and certain types of bank debt. The decline in commercial paper and TLGP debt has been mitigated by sales of short-dated Treasury securities by the Fed for its Operation Twist, analysts and investors said. This $400 billion program involves the sale of the Fed's short-dated Treasuries and uses those proceeds to buy longer-dated Treasuries with the goal of holding down mortgage rates and other long-term borrowing costs. Operation Twist is set to expire at the end of the June. The U.S. central bank on Thursday sold $8.37 billion of Treasuries due in Dec 2013 to Feb 2014. In offshore dollar trading, the benchmark London interbank offered rate on three-month dollars was unchanged at 0.46785 percent. Link this Share this Digg this Email Reprints

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