Reuters: US Dollar Report: MONEY MARKETS-Fed QE purchases could lower repo rates - Barclays

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MONEY MARKETS-Fed QE purchases could lower repo rates - Barclays Aug 24th 2012, 17:45 Fri Aug 24, 2012 1:45pm EDT By Chris Reese NEW YORK, Aug 24 (Reuters) - U.S. Treasury bill rates and overnight general collateral repo rates could dip if the Federal Reserve embarks on another round of quantitative easing and expands its balance sheet through asset purchases, according to a strategist at Barclays Capital. Expectations the Fed will eventually undertake a third round of quantitative easing, known as QE3, have risen since the release this week of minutes from the Fed's last policy meeting. The minutes showed the central bank was likely to deliver another round of monetary stimulus fairly soon unless the economy improved significantly. Any program of outright purchases of Treasuries or mortgage-backed securities would likely pull very short-term interest rates lower, said Joseph Abate, money market strategist at Barclays in New York. "If the Fed decides to do unsterilized QE -- say, on the order of $400 billion or more -- the expansion in the level of bank reserves should push the effective fed funds rate to less than 10 basis points from 13 basis points currently, although the exact magnitude is hard to estimate," Abate said. "Likewise, with overnight unsecured rates moving lower, repo rates should also decline, pulling bill rates lower as well," he said. If however, the Fed were to "sterilize" such purchases by draining excess reserves with repurchases and term deposits, that could push very short-term debt rates higher, Abate said. "Although the Fed has not indicated, we suspect that it would not do reverse repo in order to offset the increase in bank reserves because these have long been associated with a tightening in policy and might be tricky to explain," Abate said. "Sterilization -- via Operation Twist -- has caused short rates and repo rates, in particular, to back up sharply since last December." Under the Fed's current stimulus plan, which has been nicknamed "Operation Twist," the central bank is selling shorter-dated Treasuries and buying longer-dated government debt in an effort to lower long-term interest rates like those on mortgages. The rate on repos secured by Treasuries on Friday stood at 27 basis points, up from 24 basis points on Thursday, according to Reuters data. Repo rates have generally been trending higher since touching a recent low of 0.03 percent over a year ago. Meanwhile, in Europe, bank-to-bank lending rates fell to new all-time lows on Friday as weak economic surveys bolstered expectations the European Central Bank will cut interest rates as soon as next month to help combat the euro zone crisis. The fall in Euribor rates extended a fall in interbank rates that began late last year when the ECB flooded money markets with cheap longer-term loans. Three-month Euribor rates, traditionally the main gauge of unsecured bank-to-bank lending, eased to 0.295 percent from 0.303 percent on Thursday. Six-month Euribor rates also fell, to 0.564 percent from 0.572 percent. Shorter-term one-week rates were steady at 0.092 percent, while Eonia overnight rates edged up to 0.108 from 0.103 percent. Dollar-priced three-month bank-to-bank Euribor lending rates fell to 0.752 percent from 0.755 percent, while overnight dollar rates eased to 0.312 percent from 0.315 percent. Link this Share this Digg this Email Reprints

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