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Money markets repo rates firm before auction settlements

´╗┐remained firm on Wednesday a day before settlements of the week's U.S. Treasury bill sales while overseas a measure of counterparty risk eased to its lowest since mid-2007. Overnight repo rates eased a bit from Tuesday's closing levels but repo funding remains "stubbornly high" said Roseanne Briggen, market analyst at IFR, a Thomson Reuters unit."Dealers were expecting general collateral rates to soften into the high teens by today but low rates in the 20s may be the limit; the mid-20s is looking more like the new normal," she said. Higher amounts of T-bill and short coupon sales contributed to the demand for funding, Briggen said."Given the bigger Treasury bill auction settlements on Thursday, any dip in the overnight rate will prove shallow," she said. On Tuesday, the U.S. Treasury sold $40 billion in four-week bills and $25 billion in one-year bills. On Monday, it sold $32 billion in three-month bills and $28 billion in six-month bills. All four of the auctions settle on Thursday. With the Treasury due to announce its monthly auctions of two-, five- and seven-year notes on Thursday, repo rates on those maturities "are starting to heat up," Briggen said.

Federal funds traded between 0.06 percent and 0.375 percent on Tuesday and at a daily effective rate of 0.16 percent, according to the Federal Reserve Bank of New York. The Fed has a target of zero to 0.25 percent for the rate which last traded at 16 basis points on Wednesday. FUNDING STRESS APPEARS TO EASE OVERSEAS Overseas, the three-month spread between euro Libor rates and overnight index swap rates, a measure of counterparty risk, reached its lowest since mid-2007.

Three-month dollar Libor (London Interbank Offered Rates) eased to 0.37575 percent on Wednesday from 0.37875 percent on Tuesday, according to the British Bankers' Association which sets the rate. The Bank of Japan on Wednesday became the latest central bank to ease monetary policy by increasing the size of its program to buy assets. Its move came after the Fed announced more aggressive easing measures last week and after the European Central Bank pledged potentially unlimited, though conditional, bond buying. The difference between the rate of lending over three months and overnight in euros was last at 6 basis points, down from 7 basis points the previous day and around its lowest since mid 2007, right before the U.S. subprime crisis began in earnest. The three-month dollar Libor/OIS and the sterling equivalent have more than halved since January to 22 bps and 24 bps respectively."The Libor/OIS spreads in the G3 currencies dollar, euro and sterling have declined massively, especially since the end of last year ... mainly because there are various central bank measures that were introduced during (that) time," Max Leung, rates strategist at Bank of America Merrill Lynch, said.

Eonia forwards suggest markets still see some chance of the ECB cutting the deposit rate to negative territory even though expectations were pared back after ECB President Mario Draghi did not given any guidance on this at the last monetary policy meeting. Absent another deposit rate cut, Eonia rates would probably remain near current levels of 10 basis points, analysts say. If three-month Euribor rates continue to fall - as they have done recently on expectations of further cuts in the refinancing rate - Libor/OIS spreads could tighten closer to zero. But Leung said the market would struggle to take it much lower."Whether you lend overnight or you lend over a fixed term, you are not gaining anything from the risk, so banks may be even less willing to lend to each other in that case on a term basis," Leung said. Eurodollars were higher across the curve, largely helped by the Bank of Japan's stimulus announcement, extending quantitative easing by 10 trillion yen ($127 billion), double the usual amount, to 80 trillion yen, with the increase meant for purchases of government bonds and treasury discount bills. The Bank of Japan eased monetary policy on Wednesday by boosting its asset-buying program as prospects of a near-term recovery in the world's third-largest economy faded due to weakening exports and a prolonged slowdown in Chinese growth. The decision came soon after major quantitative easing announced by the Fed last week and amid worries that a territorial dispute with China, Japan's biggest trading partner, would further damage exports. Dovish minutes from the Bank of England also aided the bid for eurodollars, Briggen said. More Bank of England asset purchases to boost Britain's weak economy are likely, a number of central bank officials said in policy minutes published on Wednesday.

Money markets us repo rates climb, could rise further next week

´╗┐* 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 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."