*Dealers take majority of 3-, 6-mo bill auctions
*Brief rise in U.S. repo rates after S&P downgrade
*Post QE2 liquidity said to fortify financial system
(adds U.S. auctions, comment)
By Ellen Freilich
NEW YORK, Aug 8 Investors gave new three- and
six-month U.S. Treasury bills a cold shoulder on Monday as
yields near zero sent them in search of higher returns offered
by longer-dated U.S. government debt.
On the first U.S. trading day after Standard & Poor's
stripped the United States of its top-notch credit rating,
tumbling global stock markets fed an avid bid for safe-haven
U.S. government debt.
The Treasury sold three-month bills due Nov 10 at an
interest rate of 0.045 percentage point, down from 0.115 point
at last week's auction. USAUCTION10
It auctioned six-month bills due Feb 9, 2012 at a rate of
0.065 point, down from prior week's 0.150 point. USAUCTION13
But investors could get higher returns in longer-dated
Treasuries. Seven-year Treasury notes US7YT=RR offered a
yield of 1.75 percent and 10-year notes US10YT=RR, which the
Treasury will sell on Wednesday, offered a 2.35 percent yield.
The Federal Reserve has tried to keep short-term yields low
so that investors will invest for the longer term in riskier
assets and in the real economy.
The weaker demand for the three- and six-month bills came a
day before the Treasury begins its quarterly refunding where it
will sell $72 billion in longer-dated debt.
"It definitely creates some additional risk for the 3-year
note auction on Tuesday, said Thomas Simons, money market
economist at Jeffries & Co. in New York.
The 1 p.m. EDT (1700 GMT) bidding deadline for Tuesday's
three-year note auction also comes a little more than an hour
ahead of the statement the Federal Reserve will release at the
conclusion of its Aug 9 policy meeting.
Still, dealers bid for the three- and six-month bills about
as aggressively as they have in previous weekly bill auctions
this year, Simons said.
"Having observed the bill market's behavior for the last
few months, dealers think they can move this stuff off their
balance sheets pretty quickly," Simons said.
Meanwhile, interest rates that banks and Wall Street pay on
overnight loans backed by U.S. Treasuries rose briefly on
Monday after Standard & Poor's stripped United States of its
highest credit rating on Friday.
The cost for commercial and investment banks to borrow
overnight funds in the repurchase market rose as high as 20
basis point USONRP=. Since then it has subsided to 8 points,
flat from Friday's closing level.
The $1.6 trillion tri-party repo market is a major source
of cash for banks to fund trades and other short-term
"During the financial crisis and at the beginning of the
recession there was a lot more concern about liquidity and the
system was a lot more fragile," Simons said.
"The liquidity situation now is more robust, partly because
of what the Fed has done to get more liquidity in the system
over the last three years, expanding bank reserves and
generally putting a lot of cash in the system," he said.
In the week ended Aug. 3, the Fed's balance sheet -- a
broad gauge of its lending to the financial system -- grew to
$2.851 trillion from $2.848 trillion in the week ended July 27.
For balance sheet graphic: link.reuters.com/buf92k
The Fed's holdings of Treasuries totaled $1.641 trillion on
Aug. 3, up from $1.638 trillion the previous week.
Dollar interbank funding costs rose near four-month highs
on Monday after Friday's cut by S&P exacerbated jitters about
U.S. economic growth and the euro zone's debt troubles.
On Friday, S&P lowered the long-term credit rating of the
United States by one notch to AA-plus from AAA, but it affirmed
U.S.'s short-term credit grade of A1-plus, its highest ranking
on its short-term rating scale.
"Right now what is on people's minds is that if the U.S.
can get downgraded, then who, really, is Triple A?" said David
Rosenberg, chief economist at Gluskin Sheff in Toronto. "Maybe
Germany. But what about France? If France were downgraded, that
would call into question the European stability fund."
French sovereign credit default swaps hit a record high of
160 basis points as the U.S. rating downgrade raised questions
about how long other AAA countries, such as France, could hold
onto their top-notch ratings. [ID:nL6E7J80ZA]
"If France were downgraded, it would be a much bigger deal
for the global markets than what S&P just did to the U.S.,"
TAKE-A-LOOK-ECB to buy bonds, G7 talking [ID:nN1E776092]
TAKE A LOOK-G7 says will support markets [ID:N1E776092]
U.S. loses AAA credit rating from S&P [ID:nN1E774236]
Euro zone crisis graphics r.reuters.com/hyb65p
(Additional reporting by Richard Leong; Editing by Diane