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Money markets quarter end buying boosts treasury bills

´╗┐Quarter-end buying on Thursday helped send short-dated Treasury bill rates to recent lows, though yields remained far above levels reached in January as money funds saw continued outflows and the Federal Reserve sold short-dated debt. Three-month Treasury bill yields dropped by almost a basis point to 7.37 basis points, the lowest since March 6, while one-month bills fell to 2.29 basis points, their lowest since Jan. 25. Investors typically flock to safety assets including Treasuries at quarter-end before resuming purchases of riskier assets in the new quarter."There has been decent T-bill demand with quarter-end coming up and a bill maturity today, it all seems to be supporting our sector," said Mike Lin, director of U.S. dollar funding at TD Securities in New York. The cost banks pay to borrow excess reserves overnight extended its recent drop. The fed funds effective rate fell to 13 basis points from 14 basis points on Wednesday. The three-month London interbank offered rate also slipped on Thursday, fixing at 0.46815 percent, the lowest since November, and down from Tuesday's 0.46965 percent.

It is down from around 58 basis points at the beginning of the year, but up from lows of around 25 basis points in mid-2011. Short-term U.S. debt yields remained near recent highs, despite improvement on Thursday, and a number of factors are weighing on the debt and likely to keep rates relatively elevated. U.S. money funds, which are large buyers of short-dated debt, continued to see outflows in the latest week, with assets falling by $9.77 billion to $2.585 trillion in the week ended March 27, the Money Fund Report said on Wednesday.

The funds have seen dramatic declines outflows since January as fears over contagion from Europe's debt problems ebbed and as money funds face new regulations that could reduce their appeal to investors. The Federal Reserve also sold $8.622 billion in short-dated debt on Thursday as part of its "Operation Twist" program, which involves selling shorter-term debt to fund long-term purchases in a bid to lower rates. A possible risk factor for the repurchase market may also be whether the Treasury will consider a so-called sterilized quantitative easing, which would involve trying to offset the risk of inflation from new bond purchases with open market operations, such as reverse repos, to drain bank reserves.

The Treasury is expected to poll primary dealers next month as part of its regular survey on issues in the bond market and a question on sterilized easing could pressure repo rates if it were included, said TD's Lin."If they put that down as a question it could be something that the market gets concerned about because it means it really is being thought about, even if it doesn't necessarily mean they will enact," he said. The cost of borrowing overnight in repos backed by general collateral traded at around 18 basis points on Thursday, after closing on Wednesday at around 10 basis points. In Europe, euro zone bank-to-bank lending rates fell to a fresh 20-month low, driven lower by excess liquidity and the prospect of a long period of record low interest rates. Three-month Euribor rates, traditionally the key gauge of unsecured interbank euro lending and a mix of interest rate expectations and banks' appetite for lending, fell to 0.783 percent on Thursday - the lowest level since the start of July 2010 - from 0.787 percent the previous day. The market believes that rates may fall close to those levels in the coming months. Euribor futures showed markets were anticipating three-month rates to fall to 0.65 percent by September.

Money markets signs appear that ecbs zero rate move may work

´╗┐The European Central Bank's cut in its deposit rate to zero may be slowly breathing life into euro zone unsecured money markets, though the evidence is far from conclusive. After a slight dip in August, mainly due to seasonal effects, volumes in the euro zone overnight Eonia rates market have inched higher this month and on one day last week topped 30 billion euros for the first time since April. This, to some analysts, is a sign banks are widening the list of counterparties they choose to lend to as record low rates prompt them to take more risk to increase returns on their cash."What we're seeing is that some of the high-quality banks have started to lend to lower quality banks. In order to get some remuneration they are willing to take more risks," said Barclays Capital rate strategist Giuseppe Maraffino. Daily average Eonia volumes for September are 25.7 billion euros, compared with 20.9 billion in August, 23.7 billion in July and 23.5 billion in June, according to Reuters data. In September 2008, before the financial crisis froze interbank lending, daily Eonia volumes reached more than 70 billion euros. The data diverges from volumes seen in the equivalent overnight Euronia rate, which is arranged by a much smaller panel of top-rated money brokers.

Since just before the ECB's July's deposit rate cut, volumes in Euronia have shrunk almost three-fold to just below 3 billion euros, according to Barclays data. Euronia last fixed at -0.0017 percent, compared with 0.095 percent for Eonia. The Euronia data suggests that trade among top-rated money market players are shrinking in volume while the Eonia data suggests some of those players may be lending to perceived lower-rated counterparties."This is a very encouraging sign. If the improvement in market sentiment continues, (Eonia) volumes should continue to rise," Maraffino said.

Euronia is fixed in the UK by the Wholesale Markets' Brokers Association, while Eonia is calculated in Frankfurt by the European Central Bank. TOO EARLY TO TELL However, there is an important shortcoming to the hypothesis that banks are beginning to expand the list of lenders they want to do business with again -- the fact that usually banks need more cash for window-dressing before the end of a quarter.

"There is more lending going on and this is consistent with the overall developments in markets," Commerzbank rate strategist Benjamin Schroeder said, referring to an increase in investors' appetite for risk following the ECB's rate moves and its pledge to buy potentially unlimited amounts of government bonds."But it may also be related to quarter-end activity so I don't know if we should read too much into these volumes at this stage," Schroeder added. A turn for the worse in general sentiment is also possible, with investors uncomfortable with the fact that Spain, at the forefront of the euro zone crisis, appears reluctant to ask for a bailout and activate ECB bond-buying. Outside interbank markets, some money market players have also noticed an increase in demand for cash products."We see continued growth (in demand for) assets up to one-year," said Shahid Ikram, chief investment officer at Aviva Investors in London."Zero-rate policy from central banks has meant that corporates and banks have been able to issue very efficiently and there has been significant demand for that."