Money markets us 4 week bills well bid, buyside lays low

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* Repo rates temper buyside bid in U.S. 4-wk bill auction * Fed's front-end sales put upward pressure on repo rates * Markets eye meeting of European leaders on Wednesday * Key 3-month euro zone interbank lending rates fall * Hope for growth-boosting measures cited (Adds 4-week auction details, comments) By Ellen Freilich NEW YORK, May 22 The U.S. Treasury's sale of four-week bills was well-bid o n T uesday, with buyside participation limited by elevated repo rates that make it costly to hold inventory. Tension eased in euro zone money markets before a meeting of European leaders that could come up with some growth-boosting measures. The U.S. Treasury sold $30 billion in four-week bills at a high rate of 0.065 percent. Dealers got 78.7 percent of the sale, leaving just 21.3 percent for the buyside, comprised of the direct and indirect bids. "With the exception of the May 8 auction, the buyside has stayed away from these auctions," said Thomas Simons, money market economist at Jefferies & Co. "Overnight repo rates have been elevated in recent weeks so the cost of carry on these bills is very negative." Overnight repo rates have risen for various reasons, including the Federal Reserve's "Operation Twist" strategy in which the central bank has been selling shorter-dated Treasuries and buying longer-dated Treasuries to keep long-term interest rates low enough to stimulate economic activity. "When the Fed sells short-dated securities, investors end up with more collateral and less cash for repo trading so, if you are lending cash in the market, you'll be able to charge a higher rate," Simons said. "The Fed's purchases at the long end don't have an offsetting effect because off-the-run 10-year notes and 20- and 30-year bonds aren't traded as much in the repo market," he noted. Managers of short-term money market funds are paying attention to euro zone developments, including a meeting of European leaders on Wednesday and a June 17 Greece election that could help decide whether Greece stays in the euro zone. But because money market funds now have limited direct exposure to European bank debt, fund managers are somewhat sanguine about the headlines. "The Greek government is making a very strong push against austerity on the belief that the Germans want to maintain the euro and may be willing to give more accommodative terms than they have to date," said Jerry Klein, managing director and partner at HighTower's Treasury Partners in New York, with $20 billion in assets under management. "Money funds are watching these developments very closely, but they don't see them as a direct threat because money funds have no exposure to Greek banks and their exposure to Europe, especially peripheral Europe, has been reduced dramatically and, in some cases, is down to nothing," he said. What exposure exists is mainly to countries with a stronger banking system, like Germany, Klein said. The idea of issuing euro bonds is expected to come up during Wednesday's meeting of European leaders. Germany has opposed the idea, saying more coordination of budget and public spending policies would be needed before such an instrument could be considered. Another consideration is whether euro bonds could damage Germany's pristine credit rating and, should that happen, whether it would impact Germany any more than last year's U.S. credit downgrade had on demand for U.S. debt. "We are living in a post-crisis world where investors look beyond Moody's or S&P ratings to determine the creditworthiness of their counterparties and that's clear from the performance of U.S. Treasuries post-downgrade," Klein said. "Investors are looking at many factors -- and on a relative basis." Speculation that European leaders would adopt growth-boosting measures brought some relief to euro zone money markets on Tuesday, but tensions are expected to rise again as the June 17 Greek elections draw near. Measures of money market stress have eased this week, after a sharp rise earlier this month on a higher perceived risk of Greece leaving the euro zone. Key euro zone three-month bank-to-bank lending rates eased to two-year lows as three-year funding from the European Central Bank kept the financial system awash in liquidity. Three-month Euribor rates fell to 0.681 percent.