NEXT UP-Uneasy investors seen lining up at US debt auctions
NEW YORK, Sept 23 (Reuters) - Nervous investors seeking shelter from the current market storm should be lining up at the U.S. Treasury's new notes sales later this week.
While Treasuries are considered expensive, investors have been piling into them, given their anxiety about the market turbulence and its toll on the economy.
Last week's upheaval in the $3.5 trillion money market mutual fund industry has intensified this safety bid for government bonds.
But worries about the potential dramatic spike in government debt issuance to finance a proposed $700 billion bailout of the financial industry could curb appetite for new Treasuries, especially among foreign investors, analysts said.
The Treasury will sell a record $34 billion in two-year notes US2YT=RR on Wednesday and $24 billion in five-year debt US5YT=RR on Thursday.
"For now, people are keen for this product," said Eric Lascelles, chief economics and rates strategist at TD Securities in Toronto.
A week ago, the Reserve Primary Fund, one of the oldest U.S. money market funds, reported its shares broke the buck, or fell below $1 each, due to heavy losses on its holdings of securities issued by Lehman Brothers which went bankrupt.
This news triggered a record exodus from this once perceived safe investment, forcing money fund operators to hoard cash to meet redemptions and to stop buying nearly all securities.
"They have been forced to go almost exclusively into Treasury bills," Lascelles said.
The government introduced several measures to support money market funds to stop them from breaking the buck again and prevent another freeze in short-term credits.
Since Friday, the Federal Reserve has bought $10 billion in discount notes issued by mortgage agencies Fannie Mae, Freddie Mac and the Federal Home Loan Bank System to ease the strain in money markets due to the heavy outflows into T-bills.
Prior to Friday, money market funds had held $69 billion in agency discount notes, according to a Fed official.
So far this week, the Treasury has sold a combined $84 billion in 1-month, 3-month and 6-month Treasury bills, which has met with strong demand.
"They are going to go fine because of the trend," Jamie Jackson, portfolio manager at RiverSource Investments in Minneapolis, said of the upcoming two-year and five-year auctions.
(Reporting by Richard Leong, Editing by Chizu Nomiyama)
