Money markets quarter end buying boosts treasury bills

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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.