Finance, Commerse and Banking :: Money news

Money markets supply pushes short term us rates higher

* Bill rates, repo collateral rates, show easing in markets * Interbank lending rates steady ahead of ECB 3m tender * Strong demand for ECB liquidity could spark more worries By Emily Flitter and William James NEW YORK/LONDON, Feb 24 U.S. money markets closed out the week with an easing of conditions both in the repo and short-term Treasury markets, where demand for securities showed new slack. The extreme conditions that were present earlier in the week in the repo market, where five- and seven-year Treasury notes were trading as repo collateral at dramatically negative rates on Tuesday and Wednesday, eased further on Friday. In the Treasury bill market, rates rose as demand ebbed for the extreme safe-haven, very low-yielding securities. In both cases, new supply seemed to be the source of the market move. The Treasury Department sold $35 billion in new five-year notes on Wednesday and $29 billion in seven-year notes on Thursday. Both auctions drew strong demand and a lower-than-expected yield, forcing Treasury traders to buy more securities outright and borrow fewer of them in the repo market. The Treasury Department announced a $20 billion sale of 49-day cash management bills on Thursday. The coming sale will add more supply to the short-term bill market. In addition, the Federal Reserve sold short-term Treasuries twice this week, also adding to the supply. Tom Simons, money-market economist at Jefferies & Co In New York, said the Treasury's CM announcement seemed to have a noticeable effect on the short-term market. "The whole bill market is a little bit heavier because of this increased supply," he said. "I think it's possible we could get another mid-April maturity CM sometime soon so that would put further pressure on the market." AWAITING ECB TENDER Meanwhile, interbank markets will remain in the thrall of broader investor risk appetite next week as the European Central Bank reveals demand for its three-year loans, with a high take-up likely to buoy sentiment and push lending rates lower. Financial markets will be holding their breath on Wednesday when the ECB unveils how much three-year cash banks have borrowed in the second, and possibly last, ultra-long lending operation. In a bid to alleviate bank funding pressures the ECB has loosened collateral rules and temporarily opened up unlimited access to long-term loans, a move that has also soothed spiking tensions in the sovereign bond market. In the past, interest in central bank liquidity operations has been limited to money market experts seeking to gauge the impact on short-term interest rates. The traditional dynamic was the greater the excess cash, the lower rates would fall. But in a system already swimming in more money than it needs, bank-to-bank lending rates are now more likely to rise or fall depending on whether the refinancing operation boosts support for the euro zone's ailing sovereign bond market. The latest Reuters poll points to a demand of 492 billion euros at the long-term refinancing operation (LTRO). WHEN THE DUST SETTLES Looking beyond the assumption that above-consensus demand would push rates lower at first, analysts saw some risk that the move would not be sustained. "If there's a big number it could be an initial positive reaction by the market, but then they will turn to looking at the crisis from a more fundamental perspective and whether this is enough to turn it around," said Elwin de Groot, senior market economist at Rabobank in Utrecht, the Netherlands. "In our view, we need more measures by European leaders to do that, so it could well lead to more negative market sentiment in the days following - even if there's a big take-up." Demand well in excess of the consensus may also raise broader economic concerns: in the first instance that banks were in worse health than the bullish market had assumed, before more structural worries come to the fore. "That (knee-jerk) may move into a concern that banks might not be focusing on core business quite as much," said Peter Chatwell, rate strategist at Credit Agricole in London. "Ultimately, to improve the macroeconomic environment we need banks not just to be full of funding, but looking to take real economy business opportunities."

Republican sec official open to money fund rules

A top U.S. securities regulator said on Friday he hopes his agency will consider a fresh package of money market fund reforms, even as the new U.S. risk council plans to explore ways to also tighten regulations on the industry. Daniel Gallagher, a Republican commissioner who had previously helped block certain fund reforms at the Securities and Exchange Commission, said in an interview he is not opposed to implementing some new rules and believes the SEC can move forward on its own revised plan. Gallagher's openness to an alternative proposal may greatly increase the chances for new rules that the $2.6 trillion fund industry has fought. The industry says money market funds are a safe investment with attractive returns, while critics worry that they are vulnerable to runs and create a false sense of security for investors who do not realize they are not backed by federal insurance. SEC Chairman Mary Schapiro said last month that she had failed to get enough support among the agency's commissioners to move forward a proposal. That prompted Treasury Secretary Timothy Geithner on Thursday to send a letter to his fellow members of the Financial Stability Oversight Council to consider their own money market fund reforms, citing the SEC's inability to do so to date. Gallagher said that FSOC's plans to tackle money market funds are well in line with its authority under the Dodd-Frank financial reform law, but that the SEC does not need an extra push from the panel to act."I think we have the ability to work on a parallel track," Gallagher said. "We absolutely should come up with our own package."In an interview on the sidelines of an SEC investor advisory committee meeting on Friday, Schapiro told Reuters she is willing to keep working internally at the SEC on a proposal, but said it is also important for FSOC to remain involved."I'm always pretty optimistic I can get things done…and I am willing to keep working on it," she said. "I do think it's important for FSOC to stay focused on this and pursue it." Schapiro is also a member of the FSOC. Since last year, Schapiro has been pushing for additional reforms for money markets.

Although the SEC implemented a series of reforms in 2010, she has said those do not go far enough to prevent runs on funds like the one experienced in the financial crisis after the Reserve Primary Fund "broke the buck" when its net asset value (NAV) fell below $1 a share. She had circulated a draft proposal to SEC commissioners that contained several options. The leading option called for capital buffers coupled with redemption limits during periods of stress. A second option called for possibly moving from a stable $1 per share net asset value to a floating NAV, so that investors would not get spooked by the prospect of funds breaking the buck. But Gallagher, along with Republican Commissioner Troy Paredes and Democrat Luis Aguilar, declined to support that plan. Beyond the SEC, most in the money fund industry and corporate treasurers have also criticized Schapiro's plan.

Major companies that sponsor money market funds including: Fidelity Investments, Vanguard Group Inc, and Federated Investors Inc as well as their trade group, the Investment Company Institute, have argued that 2010 reforms are good enough. Those reforms included increasing the liquidity of funds and requiring more disclosure of their holdings. The companies also worry that new rules would drive money out of their funds, amid very low interest rates. The fund firms' have gained support from many companies and local-government agencies that rely on money funds to buy debt instruments. The SEC's three dissenting commissioners called for the commission to first conduct a study to look at whether the 2010 money market fund rules were sufficient. Gallagher said on Friday that SEC economists are honoring their request for a study, and he expects it will not take too long. He also said he is open to taking a much harder look at a reform that would couple a floating NAV with rules allowing fund boards to impose liquidity "gates" on redemptions. In doing this, he said, the SEC will have to take serious steps to address the tax and accounting issues associated with it.

"I like the floating NAV piece. I think, though, that we need to seriously consider coupling it with gating to ensure we completely address run risk," he said."I'm still not positive, based on what I've seen, that it will completely solve run risk. I think it will go a long way to help, but if you added gating to it … you get the best of both those. Gating directly addresses run risk. It stops a run in its tracks."When asked about Gallagher's comments, Schapiro said her previous proposal had included a floating NAV."I have always thought floating the NAV...was the more principled way to deal with this issue," she said. "If you think about it, you would never invent this product now with a stable net asset value. We would say this is an investment pool and its value ought to fluctuate with the value of the investments that underlie it."In Geithner's letter, he said FSOC should formally ask the SEC to move forward with new rules in a "name and shame" bid to get the divided SEC to act. He also said the council and its member regulators should consider exercising other powers to regulate the money market fund industry more tightly, including naming some firms as "systemic" and imposing capital surcharges on banks that sponsor money funds. The letter also encouraged FSOC members to explore the concept of gating, but in conjunction with capital standards. Gallagher has said he has serious concerns with any proposal requiring funds to hold more capital. At a closed-door FSOC meeting on Friday, regulators discussed Geithner's options and planned on crafting money market fund reform recommendations for the council to consider at its November meeting, Treasury said in a statement. Treasury officials said they were heartened by Gallagher's comments on the floating NAV and said they felt more optimistic now that something will get done about money market funds. The officials said all of the members of FSOC are on the same page that new reforms to reduce systemic risk are needed.