May 11, 2011 / 3:28 PM / 9 years ago

MONEY MARKETS-End of QE2 could ease repo collateral squeeze

 * Fed buying leaves just $170 bln in Treasuries to market
 * Estimated $340 bln will be available in July, Aug, Sept
 * General collateral rates kept low by 'dry' market
 By Emily Flitter
 NEW YORK, May 11 (Reuters) - Conditions in the repurchase
market may remain rough until the Federal Reserve ends its
Treasury purchasing program at the end of June, analysts said
on Wednesday.
 The rates on general collateral in the repo market have
been stunningly low since April 1, when a change in insurance
assessment methods for commercial banks forced a flood of cash
into the short-term financing markets, sucking up the
collateral that comprises the other side of a repurchase
agreement.
 Rates on the securities repo that traders use as general
collateral fell to single basis-point ranges and even turned
negative in cases where a particular type of security came into
greater demand.
 And Treasury purchases by the Fed may be adding to the
problem.
 Ward McCarthy, chief financial economist at Jefferies & Co.
in New York, said the Fed's Treasury purchases from the
beginning of its easing program in November until the end in
June will leave just $170 billion in floating Treasury coupons
available in the market.
 Even though the Fed lends out some of the securities it
purchases so they can still be used as repo collateral, its
ownership of such a large portion of securities issued adds to
the pressure on repo collateral rates.
 "The issue is what's part of the floating supply in the
market," McCarthy said. "The Fed lending can help ease squeeze
types of situations but that's an augment to a market that's
just dry."
 General collateral rates remained low on Wednesday, with
rates on two-year Treasury notes in negative territory,
according to Roseanne Briggen, analyst at IFR, a unit of
Thomson Reuters.
 "Short-term, safe, liquid assets are still seeing demand,
even as real money has been finding alternative slightly higher
yielding investments," Briggen wrote in a note to clients on
Wednesday.
 The environment could get friendlier starting in July.
McCarthy notes the Treasury will issue a total of $536 billion
in Treasury coupons in July, August and September. With the Fed
no longer buying, that will mean $340 billion in Treasuries
will be available to market participants, once maturing
securities are taken out.
 "The floating supply of treasuries will double," McCarthy
said.
 (Editing by Leslie Adler)


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