Reuters: US Dollar Report: MONEY MARKETS-US repo rates climb, could rise further next week

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MONEY MARKETS-US repo rates climb, could rise further next week Aug 23rd 2012, 18:50 Thu Aug 23, 2012 2:50pm EDT * US Treasury supply settlements may pressure repo rates higher * US commercial paper market grows on the week * Euro zone implied interest rates may be too low if ECB buys bonds By Chris Reese and Kirsten Donovan NEW YORK/LONDON, Aug 23 (Reuters) - Overnight general collateral repo rates rose on Thursday and could continue higher next week with the U.S. Treasury set to auction $99 billion of coupon supply. The rate on repos secured by Treasuries rose to 24 basis points on Thursday from 20 basis points on Friday. Repo rates have generally been trending higher since touching a recent low of 0.03 percent over a year ago. The Treasury is scheduled to auction $35 billion of two-year notes on Tuesday, $35 billion of five-year notes on Wednesday and $29 billion of seven-year notes next Thursday. Settlements for such auctions can put upward pressure on general collateral rates in the days following the sales. In addition to next week's auctions, the Treasury on Thursday sold $14 billion of reopened five-year Treasury inflation-protected securities at a record negative yield of -1.286 percent. "There will be a lot of collateral to finance over the Labor-day weekend given the settlement of the $14 billion five-year TIPS auction today, which will settle on August 31, along with the usual month-end funding demand," said Roseanne Briggen, market analyst at IFR, a Thomson Reuters unit, in New York. "Today's announcement of the monthly twos, fives and sevens will also settle on August 31, so repo general collateral is expected to move higher again by late next week," Briggen said. Meanwhile, U.S. seasonally adjusted commercial paper outstanding grew $4.7 billion to $1.025 trillion in the week ended Aug. 22, the Federal Reserve said on Thursday. Without seasonal adjustments, U.S. commercial paper outstanding grew by $8.6 billion to $998.1 billion. U.S. non-seasonally adjusted foreign bank commercial paper outstanding rose $5.4 billion to $197.3 billion in the same week, the Fed said. Also, the spread on two-year interest rate swaps over Treasuries narrowed to 17.75 basis points, marking the tightest spread since May 2011, from 19.50 basis points late Wednesday. The spread has generally been narrowing since hitting a recent wide of 54.5 basis points in November. Across the Atlantic, analysts said euro zone implied interest rates may be too low if the European Central Bank buys Spanish and Italian bonds in large numbers to curb borrowing costs. Analysts are expecting further ECB rate cuts to help kick start the economy and encourage banks to lend cash but a concerted effort to lower and stabilize peripheral yields may be more successful in restoring confidence. "One of the things the ECB tried to do was entice banks to lend," London-based RBS rate strategist Brian Mangwiro said on Thursday. "If the ECB to some extent reduces the downside risk coming from Spain and Italy, you could say the need to move the deposit rate into negative territory goes away." Forward overnight rates, show markets are pricing in a slim chance of a cut in the rate the ECB pays banks to deposit cash overnight -- now zero percent -- while a Reuters poll reflected expectations of a 25 basis point cut in the ECB's main refinancing rate to 0.5 percent in September. The zero percent deposit rate means banks make no money from leaving cash at the central bank and has provided little incentive for them to lend to one another. A further cut in the rate would actively penalize them for leaving the money there. The ECB has said it might buy Spanish and Italian debt if the countries seek help from the euro zone rescue fund. Speculation this week has focused -- despite attempts by the ECB to quash it -- on whether the central bank will try to keep borrowing costs at a pre-determined level after media reports suggesting such a move was being discussed. Central bank sources told Reuters on Thursday that while the ECB was considering setting a yield target, it would not make the levels public. "(Bond buying) would make rate cuts less likely," said Peter Schaffrik, head of European rate strategy at RBC Capital Markets in London. "(The ECB) have achieved low rates for the triple-A countries already, but the trick really is to bring the higher yielding bonds down. You could potentially still do something by bringing down the refinancing rate but it's not the main thing here." Link this Share this Digg this Email Reprints

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