MONEY MARKETS-US rates kept low by prospect of more easing

* U.S. rates anchored by likelihood of more easing

* Euro interbank rates up, new maintenance period begins

* Weber calls for support mechanisms to be scaled back

* Dollar Libor rates steady, QE anticipation heightens

By Ellen Freilich and Kirsten Donovan

NEW YORK/LONDON, Oct 13 (BestGrowthStock) – Short-term U.S. rates
remained steady at low levels on Wednesday, anchored by the
Federal Reserve’s commitment to keep interest rates low for an
extended period.

That commitment looks likely to get another shot in the arm
in November when market participants widely expect the Fed to
begin buying more assets in a second round of so-called
quantitative easing.

While the Fed is expected to buy intermediate-term
securities rather than those at the shortest end of the
maturity range, the ample liquidity in the system should
maintain short rates at levels close to zero.

Three-month bills yielded 0.137 percent on Wednesday while
six-month bills yielded 0.173 percent. One-month bills yielded
0.157 percent.

Rates hovering above zero, however, did not dissuade people
from bidding on Wednesday’s four-week Treasury bill auction.

The Treasury’s four-week bill auction was aggressively bid
this week, stopping one basis point short of the 11:30 a.m.
when-issued bid for the second straight week.

“It seems that yield levels, cash flows, and sentiment for
rates have had very little effect on auctions in recent weeks,”
said Thomas Simons, money market economist at Jefferies & Co.
in New York. “They have all stopped short as huge bids are
generated by market participants who are left with little
choice in assets to move their money into.”

The 4.72 ratio of bids received over those accepted in the
four-week bill auction was below the prior week’s bid-cover
ratio of 5.08 and the previous week’s 5.16. The latter was one
of the 10 highest bid-cover ratios on record.

GREAT EXPECTATIONS

Benchmark dollar Libor rates (USD3MFSR=: ) held at their
lowest since late March after minutes from the Fed’s latest
meeting showed officials thought the struggling economic
recovery might soon need more help, paving the way for another
round of quantitative easing. [ID:nN12188145]

“(The Fed is) in a position where they have to deliver in
November or there will be a very sharp and vicious market
reaction,” Commerzbank rate strategist Christoph Rieger said.

Interbank euro lending rates nudged higher on Wednesday as
banks increased their demand for cash at the start of the new
European Central Bank reserve maintenance period, pushing up
overnight borrowing costs.

The cost of funding jumped higher after banks repaid around
80 billion euros to the ECB at the end of September, although
that still left excess liquidity in the banking system at
around 45 billion euros.

Warnings from ECB Governing Council heavyweight Axel Weber
late on Tuesday, along with weekend tweaks to the central
bank’s collateral rules, reminded markets that banks are
ultimately expected to stand on their own feet.

Weber said the ECB’s program to stimulate the economy by
buying government bonds had not worked and should be scrapped
and also called for the bank to scale back its other forms of
support as soon as possible. [ID:nN12121001]

His comments came after the ECB made changes to its legal
framework, underscoring its power to limit individual banks’
borrowing at ECB lending operations amid ongoing discussion
about how to tackle the dependency of some institutions on
central bank funding. [ID:nLDE6971YN]

Overnight deposits at the ECB dropped to 44 billion euros
from more than 100 billion the day before as the new ECB
maintenance period began. [ID:nECB001218]

Overnight funds were changing hands at between 0.60 and
0.70 percent, traders said, depending on the perceived
“quality” of the borrower.

That means the overnight Eonia rate (EONIA=: ) is now seen
fixing around the top end of that range as banks, seeking to
“frontload” their reserve requirements and bid more
aggressively in the interbank market, given lower liquidity.

The rate fixed higher at 0.762 percent on Tuesday, but that
was due to the regular ECB cash drain from the system overnight
at the end of the previous maintenance period. Prior to that,
it had been around 0.40 percent.

Two- and three-week Eonia rates (EUREON2W=: )(EUREON3W=: ) at
0.71 percent and 0.68 percent, indicate however that the
overnight rate is currently seen falling only slightly from
current levels.

“We’ll be at these levels for a while,” a trader said.

Benchmark euro Libor rates (EUR3MFSR=: ) edged up to 0.92200
percent, while equivalent Euribor rates (EURIBOR3MD=: ) closed in
on the ECB’s 1 percent refinancing rate, setting at 0.985
percent.
(Additional reporting by Kirsten Donovan; Editing by Jan
Paschal)

MONEY MARKETS-US rates kept low by prospect of more easing