June 6, 2012 / 8:20 PM / 8 years ago

MONEY MARKETS-Key dollar rate dips on stimulus hopes

* U.S. repo rates fall for a second day
    * Front-month Eurodollar futures rise
    * Three-month dollar Libor unchanged

    By Richard Leong	
    NEW YORK, June 6 (Reuters) - The cost for banks and Wall
Street to borrow dollars from investors fell on Wednesday
prompted by speculation of further monetary easing by the U.S.
Federal Reserve and the European Central Bank.	
    Hopes of more stimulus measures from the two major central
banks reduced the strain in the dollar funding market as
investors last week hoarded cash and low-risk investments rather
than lend money to garner higher returns.	
    Still, money market funds and other investors remain anxious
about Europe's fiscal problems spiraling into a global crisis,
analysts and investors said.	
    "Today there's liquidity but we know that liquidity could
dry up quickly, but that's the risk investors have been
preparing for the past four years," said Sean Simko, head of
fixed income management at SEI Investments Co. in Oaks,
Pennsylvania, which has $189 billion under management.	
    Some dollars have been parked in the $1.6 trillion tri-party
repurchase agreement market which banks and bond dealers depend
on to fund their trades and operations.	
    The overnight rate on repos secured by U.S. government debt
was last quoted at 0.21 percent, compared with 0.24 percent late
on Tuesday, according to Reuters data.	
    This key short-term rate for dollar funding fell for a
second day but remained about 12 basis points above the year's
low seen back in mid-April.	
    ECB President Mario Draghi said the ECB will continue to
supply unlimited funding to euro zone banks at least until
mid-January 2013. 	
    On the other hand, he downplayed the idea of another large
three-year loan operation for now. The ECB injected more than 1
trillion euros into the banking system since December in a move
to help banks to replenish their capital and to rid of soured
sovereign investments. 	
    In the United States, Atlanta Federal Reserve chief Dennis
Lockhart said on Wednesday the U.S. central bank might consider
further monetary easing if the U.S. economy weakens due to high
unemployment or Europe's debt trouble spills over to these
    Bets on more Fed stimulus intensified in the wake of last
Friday's poor domestic jobs report and the looming end of the
Fed's $400 billion Operation Twist at the end of the month.	
    Overnight, the repo rate has stayed higher than what some
traders had thought. They had reckoned a seasonal decline in
Treasury bill supply in the spring would drive up demand for
repos and lower their interest rates. 	
    But the Fed's steady selling of its T-bill holdings due to
Operation Twist resulted in a heavier supply of debt that Wall
Street dealers have to finance, analysts said.	
    Depleting the cash that would otherwise go into repos is the
hefty redemption of money market funds since the beginning of
the year. Money funds are major investors in repos.	
    Money market fund assets fell $1.83 billion in the week
ended June 5 to $2.545 trillion, according to Money Fund Report,
a service of iMoneynet. Since end of 2011, money fund assets
have fallen $126 billion or 5 percent.	
    If Operation Twist ends as expected and not extended -- as
some analysts are predicting, overnight repo rate should fall as
banks and dealers will have less Treasury supply to finance.	
    "A lot depends on Operation Twist," said Alex Roever,
short-term fixed income strategist at JPMorgan Securities in New
    In the derivatives market, the rates on short-term dollar
interest swaps fell, while Eurodollar futures rose,
implying traders expect interbank costs for dollar will fall.	
    The two-year swap rate, a gauge of short-term
private credit costs in dollars, was down marginally to about
58.5 basis points, while its premium over comparable U.S.
Treasuries fell for a third day to 33.25 basis
    Eurodollar futures for 2012 and 2013 deliveries rose
0.5 basis point to 3.5 basis points on the day, implying traders
see further central bank actions lowering interbank borrowing
    Offshore dollar trading picked up on Wednesday after its key
hub - United Kingdom - was closed for two days due to market
    The benchmark London interbank offered rate on three-month
dollars held at 0.46785 percent.
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