MONEY MARKETS-US Treasury bill rates fall on bank concerns

* Renewed bank jitters fan bids for U.S. Treasury bills

* Speculations over bank stress results also raise worries

* One-month T-bill rate approaches zero

* Two-year swap spread expands to level of 1-month ago
(Updates market prices; changes dateline, previous LONDON)

By Richard Leong

NEW YORK, April 20 (Reuters) - U.S. Treasury bill rates
fell on Monday, as renewed worries over the financial sector
spurred a sell-off on Wall Street, fanning bids for ultra-safe
investments.

Investors scrambled for cash-like vehicles, sending the
rate on one-month T-bills close to zero. This also raised the
cost to exchange short-dated fixed- and floating-rate dollar
cash flows in the interest rate swap market.

Some analysts downplayed the recent decline in Treasury
bill rates, attributing it to shrinking weekly issuance as the
government sought longer-term financings in a bid to lock in
historically low rates.

"The theme contributing to the bid into government
securities is the concern over the banking sector," said Eric
Lascelles, chief economics and rates strategist with TD
Securities in Toronto.

The safety bid for T-bills grew after traders were spooked
by the spike in credit losses at Bank of America (BAC.N),
despite its reporting a quarterly income of $2.81 billion, more
than twice what it earned in the year-earlier quarter.
[ID:nN20380236]

Worries about banks' solvency, together with speculations
about the outcome of the stress tests of banks by the U.S.
government, triggered a stock sell-off and revived demand for
government debt.

Those concerns spilled into other markets, as investors
demanded higher risk premiums on risky assets.

For example, the cost of exchanging fixed-rate interest
payments for floating-rates, which gauges corporate borrowing
cost, rose to its highest level in almost a month.

The two-year swap spread, which grows with increased risk
aversion, was quoted at 61.25 basis points midmarket early
Monday afternoon, compared with 60.00 basis points late on
Friday.

FLUSH WITH CASH

While there has been more risk-taking by investors in
recent weeks on hopes of an economic recovery in the second
half of the year, money market fund managers have been
struggling to generate income with low-risk investments like
T-bills, analysts said.

At the peak of the credit crisis last autumn, the money
market industry was in turmoil after the share of one of its
largest funds fell below $1, or "broke the buck" because of
heavy losses on securities issued by Lehman Brothers.

"The pressure has been on money fund managers to be risk
averse, but you can't just be in one-month T-bills that yield
under 5 basis points," said Steve Van Order, fixed income
strategist at Calvert Asset Management in Bethesda, Maryland.

Despite their measly yields, demand for T-bills has been
intense. The U.S. Treasury Department sold $28 billion in
three-month bills and $27 billion six-month bills to strong
demand on Monday.

It said it will auction $20 billion in one-month T-bills on
Tuesday. This is the smallest weekly offering for this maturity
in nine months and about half of what was offered just a month
ago.

Outside of the T-bill sector, London interbank offered
rates for three-month dollar funds slipped close to their
lowest since mid-January with equivalent sterling rates also
nudging lower ahead of Britain's annual budget on Wednesday,
which is expected to paint one of the most grim outlooks in
decades for the U.K. economy.
(Additional reporting by Emelia Sithole-Matarise and Kirsten
Donovan in London and Vidya Ranganathan in Singapore; Editing
by Padraic Cassidy)