N.Y. Fed TSLF auction meets tepid dealer demand

NEW YORK (Reuters) - Wall Street dealers sought to exchange fewer than expected of their poor-performing investments for $75 billion of U.S. Treasury securities in a Federal Reserve auction on Thursday, a sign funding needs are not that dire.

Primary dealers, which do business directly with Fed, submitted just $86.1 billion of bids to obtain the Fed's offering of low-risk U.S. government securities for 28 days. This resulted in a bid-to-cover ratio of 1.15, a barometer of demand, the New York Fed said on its Web site.

Tepid dealer bids "suggest that dealers didn't have this urgent need for funds at quarter-end that people imagined," said Matthew Moore, economic strategist with Banc of America Securities in New York.

The Fed's Term Securities Lending Facility, or TSLF, is part of a liquidity campaign by the central bank to aid the beleaguered U.S. financial sector, which has suffered more than $120 billion in write-downs tied to bad mortgage investments.

The stop-out rate, or the lowest fee rate accepted by the Fed, was 0.33 percent, the New York Fed said.

TSLF differs from other newly created lending programs from the Fed. Rather than obtaining cash from the Fed, winning bidders at the TSLF auction will receive Treasuries.

By exchanging sought-after Treasuries for dodgy mortgage-backed bonds, the Fed hopes to stimulate lending between institutions and thaw markets.

At the moment, banks and primary dealers have clung to financing from Fed and other central banks, which have restricted credit and driven up lending costs.

(Reporting by Richard Leong and John Parry; Editing by Tom Hals)