Reuters: Economic News: Bill supply, rates may drop for tax season

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Bill supply, rates may drop for tax season Mar 26th 2012, 18:18 By Karen Brettell NEW YORK | Mon Mar 26, 2012 2:18pm EDT NEW YORK (Reuters) - The Treasury may keep reducing its supply of new short-dated debt in the coming months as tax receipts rise, which traders expect is likely to push T-bill yields lower in the short-term. On Monday, the Treasury sold $60 billion in three-month and six-month bills at high yields of 8.5 basis points and 15 basis points, respectively, after announcing last Thursday that the sale would be $4 billion less than traders had expected. "The cuts are signaling that there is strength in tax receipts and that we're going to see bill supply continuing to grind lower over the next few weeks," said Kenneth Silliman, head of short-term rates trading at TD Securities in New York. Further cuts are now likely and the reduction in supply will push down Treasury bill yields and overnight repurchase- agreement rates in the short-term, Silliman said. Treasury bill yields have increased dramatically from near zero levels at the beginning of the year as the Federal Reserve sells short-dated debt as part of its "Operation Twist" program at the same time as money market funds post outflows and purchase less of the debt. Three-month yields have increased to 8 basis points from 1 basis point in early January. Six-month yields have risen to 15 basis points from less than 5 basis points in the same timeframe. The cost of borrowing against Treasuries in the overnight repo market has also increased, with traders also saying the potential for a new round of sterilized quantitative easing is also likely to keep the rates relatively high. So-called sterilized easing would involve trying to offset the risk of inflation from new bond purchases with open market operations, such as reverse repos, to drain bank reserves. The overnight cost of borrowing against Treasuries in the repo market has risen to around 23 basis points, from 13 basis points in early February. The reduction in bill supply in the coming months, however, is expected to overcome these recent dynamics, even if only temporarily. "Repo is still trading too high," TD's Silliman said. "We typically start to see it edge lower through the last week of March." Analysts at JPMorgan estimate that overnight repo rates may drop by around 3 t 5 basis points by quarter-end, noting that the rates on average have tightened by 10 basis points from the middle of March to the end of the quarter over the previous three years. Around $95 billion in FDIC-backed bank debt is also scheduled to mature by the end of June, with almost $25 billion coming due in April, which will further reduce the supply of highly rated debt and could boost agency and Treasury debt, JPMorgan said. The three-month London interbank offered rate continued to decline on Monday, after effectively stalling for the previous two weeks in part due to renewed concern that Europe will face an economic slowdown that will impede the ability of countries to reduce crippling debt loads. The rate, which is used as a benchmark for the interest-rate swap market, fell to 0.47265 percent, from 0.47315 percent on Friday. It has fallen from over 58 basis points at the beginning of the year. The premium charged to swap three-month euros into dollar loans reflected continuing improvement, falling to 54.5 basis points from 56.5 basis points on Friday. The swap has tightened from 119 basis points at the start of the year. (Editing by Jan Paschal) Link this Share this Digg this Email Reprints

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