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 (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."