Money markets us 4 week t bill rates rise to highest in a year

← Homepage

* Increasing supply boosts U.S. 4-week T-bill yields * Three-month euro/$ cross currency basis swap tightens By Chris Reese and Marius Zaharia NEW YORK/LONDON, Aug 15 U.S. one-month Treasury bill yields climbed to their highest level in over a year on Wednesday as rising supply of shorter-dated U.S. government debt pushed down prices. The yield on the one-month bill rose to 0.11 percent, which was the highest since July 2011, from 0.09 percent late Tuesday. "It is primarily a supply issue," said Brian Smedley, U.S. rates strategist at Bank of America Merrill Lynch in New York. "The increase in short-term yields is related to this week's issuance of 15-day Treasury cash management bills. The one-month sector has cheapened as the market has had to digest a $25 billion increase in bill supply." The Treasury on Tuesday sold $25 billion of 15-day cash management bills at a high rate of 0.11 percent. Also on Tuesday, the Treasury sold $40 billion of four-week bills at a high rate of 0.11 percent, which was the highest rate since a similar auction Feb. 14. Bill issuance is expected to rise through the year to meet deficit financing needs. The increase in supply comes as the Federal Reserve sells shorter-dated Treasuries as part of its latest stimulus program, dubbed "Operation Twist." The program extends the maturity of the central bank's Treasuries holdings in a bid to lower mortgage rates and other long-term borrowing costs. As part of "Operation Twist," the Federal Reserve on Wednesday sold $7.796 billion of Treasuries with maturities ranging from February 2014 through August 2014. Meanwhile, a barometer of dollar funding risk reached its best levels in a year on Wednesday and was likely to improve further in the near term on perceptions of a brighter global economic outlook and a slowdown in the pace of the euro zone debt crisis. Stronger-than-expected French and German economic output data and U.S. retail sales on Tuesday improved appetite for riskier assets. The dollar rose against major currencies on bets that the data would make the Federal Reserve less willing to print more greenbacks. But rising U.S. government debt yields show dollar demand purely for the purpose of holding a safe-haven currency has decreased, which is also reflected in some sectors of money markets. Also, the European Central Bank's signal that it may resume purchases of government bonds if certain conditions are met has helped at least temporarily to ease worries over banks' holdings of high-yielding Spanish and Italian debt. As a result, the three-month euro/dollar cross currency basis swap, which shows the rate charged when swapping euro interest rate payments on an underlying asset into dollars, narrowed to minus 37.50 basis points, its tightest since late July 2011. The measure, which widens in times of stress when dollars are harder to find, traded as wide as minus 167.50 in November last year when the euro zone crisis had heightened before massive ECB cash injections cooled the situation. "This narrowing is ... due to the potential stepping up of the policy response within Europe, particularly led by the ECB," said Ian Stannard, head of European FX strategy at Morgan Stanley in London. "The market hopes that policy initiatives are likely to be forthcoming following ... indications that they (the ECB) are willing to provide further assistance if required." Euro/dollar FX basis swaps could narrow further in the next few weeks, but "not dramatically," Stannard said. The trend could well reverse if the anti-crisis plan proposed by the ECB fails to materialize by the end of September or at least to look like a credible future backstop to the euro zone crisis. For now, markets see risks in the ECB's pre-condition that troubled countries need to ask for aid from euro zone rescue funds, as it raises the possibility that the debt crisis in Spain may have to worsen before Madrid considers such a move.