| NEW YORK
NEW YORK Feb 6 U.S. overnight repo rates
eased on Monday but are likely to remain relatively high in the
near term as money market funds reduce loans in the asset class
and short-dated supply increases.
Overnight repo rates traded at around 13 basis points on
Monday, down from around the high-20 basis point area last week.
Repo rates have been pressured higher in recent weeks by
dealers adding to already large inventories of collateral that
need to be financed by purchasing short-dated debt from the
Federal Reserve as part of its Operation Twist program.
U.S. money funds have also been reducing loans in repo as
increasing risk appetite leads investors to withdraw from the
ultra safe funds, and as the money funds tentatively return to
bank lending through commercial paper and certificates of
"We're seeing money funds reallocate money out of the
overnight repo market and into bank credit," said Kenneth
Silliman, head of short-term rates trading at TD Securities in
"The thawing of bank credit happened at a time when dealers
were also trying to absorb an exceptionally high amount of
paper," he added.
The Fed is expected to sell another $200 billion in
short-dated debt as part of Operation Twist, according to
Barclays Capital. The program involves selling short-dated debt
to fund longer-dated purchases that the Fed hopes will reduce
long-term borrowing rates.
The Treasury has also been unexpectedly increasing the size
of its Treasury bill auctions. One-month bill rates
saw a slight backup on Monday after it said it will sell $37
billion in four-week bills, up from previous one-month sale of
The U.S. also sold $31 billion in six-month bills
on Monday at yields of 10 basis points, the highest level since
Money funds are continuing to see fund redemptions, which is
leading them in turn to reduce repo lending.
Money fund assets have fallen by around $50 billion from
January 11 through early February, according to the Investment
"That certainly takes its toll," said TD's Silliman. "When
funds see those decreases, rather than selling paper those
decreases come out of the most liquid assets and a lot of times
that's overnight repo."
Interbank lending rates continued to ease on Monday, based
on the benchmark three-month dollar London interbank offered
rate. The Libor rate dropped to 0.52325 basis points
and is down from over 0.58100 basis points at the end of the
The premium charged to swap three-month euros into dollar
loans was relatively steady at around 0.75
percent, down from recent highs of around 1.60 percent but still
higher than the 0.40 percent area where the swap had traded in
mid-2011 before fears over Europe flared.