Money markets us repo rates elevated before fomc

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* Talk of Fed mulling reverse repos lifts repo rates * Analysts see low chances of a Fed "sterilized" bond move * No more ECB aid, T-bill supply as factors on higher rates By Richard Leong NEW YORK, March 12 A key borrowing cost for banks and bond dealers slipped on Monday, but remained at elevated levels ahead of a Federal Reserve policy meeting, which might hint at a move that could push up short-term interest rates. What banks and dealers charge each other on overnight loans secured by U.S. Treasuries fell to about 19 basis points from 21 basis points on Friday. This interest rate on overnight repurchase agreements (repos) is roughly 10 basis points above the recent low seen 2-1/2 weeks ago when investors scrambled for Treasuries in this corner of the funding market worth $1.6 trillion. Since then, the overnight repo rate had risen on a combination of factors including fading expectations that the European Central Bank will inject more cheap funds into the region's banking system and a modest increase in weekly Treasury bill supply since mid-February. "The main source of liquidity in the market, LTROs, over the last few months is now essentially a thing of the past," said Russ Certo, head of rates at Gleacher & Co. in Stamford, Connecticut. Since December, the ECB awarded more than a trillion euros in three-year loans through two long-term refinancing operations (LTROs) in an effort to give them time to raise capital and deal with the soured investments in peripheral sovereign countries. Last week, a Wall Street Journal article added upward pressure on dollar repo rates. It said should the Fed decide to buy more bonds to boost growth, it could borrow back the money it used to buy those bonds for short periods of time at low interest rates. By engaging in "reverse repos," the Fed would take that money out of circulation, or "sterilize" it. Such a Fed move could reduce the amount of the cash in the financial system, resulting in banks and dealers bidding more aggressively for short-term funds. "This could push short-term rates higher," said Raymond Gilmartin, head of repo trading at Bank of Nova Scotia in New York. Wall Street's consensus view is the Fed will stick to its near zero interest rate pledge until at least late 2014 at its policy meeting on Tuesday, but it would refrain from announcing any additional bond purchase program. The Federal Open Market Committee, the U.S. central bank's policy-setting group, is expeccted to release a statement at about 2:15 p.m. (1815 GMT). Some analysts downplayed speculation of a "sterilized" bond purchase program, which the Wall Street Journal story suggested the Fed might consider because it could curb inflationary pressure, as a factor behind the rise in overnight repo rates. They said any more stimulus from the Fed is unlikely after last Friday's better-than-expected U.S. payroll report and other recent encouraging reports on manufacturing. These analysts reckon the increase in repo rates stems more from an expected pickup in borrowing among dealers to fund $66 billion in coupon Treasuries supply this week and money market funds shifting money into riskier assets from their repo and Treasury bill holdings. Meanwhile, the elevated level in repo rates has partly fueled a rise in Treasury bill rates as investors demand higher returns on their short-term cash investments, they said. On Monday, the U.S. Treasury auctioned a combined $64 billion of three-month and six-month bills at higher interest rates than a week earlier despite stronger bids for them. The Treasury sold $33 billion of three-month bills at a rate of 9.5 basis points, up from 8.0 basis points a week ago. It sold $31 billion of six-month bills at a rate of 14.5 basis points, up from 13.0 basis points last week.