MONEY MARKETS-U.S. bill yields seen at near-term top

* U.S. bill yields expected to fall toward year-end

* Markets price in extended ECB banking sector support

* Dollar funding costs rise

By Ellen Freilich and William James

NEW YORK/LONDON, Nov 30 (BestGrowthStock) – U.S. bill yields, up in
recent weeks, could go into reverse as year-end approaches.

A four-week U.S. bill auction stopped on the 11:30 a.m. EST
when-issued bid at 17.5 basis points. The 4.66 ratio of bids
received over those accepted was stronger than last week and
better than the year-to-date average, said Thomas Simons, money
market economist at Jefferies & Co in New York.

Dealers took 47 percent of the auction while indirect
bidders took 34.8 percent. The direct bid was 18.3 percent, the
strongest since June 22.

Simons said bill yields had risen in recent weeks as
auctions drew a less-aggressive bid. But that trend seems to
have reached an end, he said.

“Yields now look to have hit the top in the near-term as
year-end approaches,” he said. “The tide is beginning to (turn)
on bills. Auctions will be bid more aggressively next week and
yields in the market will begin to fall.”

Investors stepped up bets on Tuesday that the euro zone
debt crisis would push the European Central Bank to slow the
withdrawal of its support to the region’s financial
institutions ahead of a policy meeting.

The ECB meets on Thursday against a backdrop of
intensifying pressure on the currency bloc’s peripheral states
and is expected to announce how much support it will continue
to offer to euro zone banks through the provision of loans.

Despite the central bank’s well-signaled determination to
wean banks off its unlimited supply of fixed-rate funding, the
recent escalation of sovereign tensions has boosted expectation
liquidity will remain ample for longer.

“The market is taking the view that the ECB will slow down
the exit,” said BNP Paribas strategist Matteo Regesta.

“Looking at the Eonia forward curve you don’t have full
normalization, not even by December next year,” he added.

Under regular liquidity conditions — in which the ECB
offers loans at a variable, rather than fixed rate — overnight
rates (EONIA=: ) would sit around 7 basis points above the
central bank’s current 1 percent refinancing rate, he said.

The market cost of securing three-month funding in a year’s
time was last at 1.05 percent (EUROIS12X15=R: ), having fallen by
20 basis points since Nov. 18, according to Reuters data.

The fall shows a growing expectation that liquidity
conditions will remain loose in the banking system, keeping
rates lower for longer. Euribor futures (0#FEI:: ) also reflected
growing expectation of a slower ECB withdrawal.

In the past two weeks investors have pared their interest
rate expectations by 12 bps, according to the rates implied by
a rise in the most actively traded March Euribor futures
contract (FEIH1: ), which was up 0.02 point on the day.

Analysts said the most likely choice for the ECB would be
to press ahead with switching three-month tenders to a variable
rate bidding process to signal their commitment to an exit, but
leave the one-week and one-month operations at a fixed-rate,
unlimited allocation to avoid ramping up funding stresses.

“I don’t think they can do much more than that. Otherwise
they risk adding to the turmoil we’re seeing in the periphery,”
said Nick Stamenkovic, strategist at RIA Capital Markets.

“The last thing they want to see is the contagion go to
another level but, on the other hand, the ECB doesn’t want to
be perceived to be supporting weak banks.”

DOLLAR RATES RISE

The fallout from the crisis continued to hurt banks’ access
to funding in the interbank markets, with many weaker
institutions still frozen out even after Ireland agreed an 85
billion euro EU/IMF bailout package at the weekend.

“For a long time we’ve not seen Greek names in the market
and we haven’t seen the Irish paying in the interbank market
for a while. Likewise, Portuguese and the smaller Spanish banks
haven’t been around – but that’s been ongoing for a while,” a
trader said.

Markit’s iTraxx Senior Financials credit default swap index
(ITEFA5Y=: ) rose 8 bps to 177 bps.

Portugal’s central bank warned that the country’s banks
faced an “intolerable risk” if the government in Lisbon failed
to consolidate public finances. [ID:nLDE6AT0Z0]

Analysts said Spain’s banks were a potential liability in
its fight to avoid an Ireland-style bailout. [ID:nLDE6AS1IX]

The benchmark three-month dollar Libor rate (USD3MFSR=: )
rose for a fifth straight session to 0.30031 percent as banks
sought safety in the highly liquid dollar market.

A growing reluctance by non-euro zone institutions to make
dollar-for-euro interest rate swaps based on euro-denominated
assets pushed five-year cross currency basis swaps
(EURCBS5Y=ICAP: ) lower to -40 bps, matching levels seen earlier
this year before Greece’s bailout.
(Editing by Dan Grebler)

MONEY MARKETS-U.S. bill yields seen at near-term top