Money markets short rates stay low, 4 week t bills sold

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* U.S. 4-week bills sold in recent tight range* Prospective ECB rate cut pushes Euribor lower* Interbank lending rates ease* Overnight collateral rates holding in upper teensBy Ellen FreilichNEW YORK, Aug 7 The Federal Reserve's near-zero interest-rate policy kept U.S. bill rates low on Tuesday, providing the backdrop for a typical weekly four-week Treasury bill sale. The Treasury sold $40 billion in four-week bills at a high rate of 0.085 percent, awarding 23.55 percent of the bids at the high. The value of bids received outflanked those accepted by a 4.23 ratio.

"This was just another business-as-usual four-week bill auction," said Thomas Simons, vice president and money market economist at Jefferies & Co. "The auction fit the same profile we've seen a lot in these auctions over the last few months where the statistics seem to come in a really narrow range."Elsewhere in the short-term paper market, overnight general collateral repo rates, closing at 10 basis on Monday, opened higher on Tuesday, but were expected to soften again by the end of the day, said Roseanne Briggen, market analyst at IFR, a unit of Thomson Reuters. Two-year and three-year notes traded above general collateral rates while five-year and seven-year notes were a bit lower, she said. "The 10-year and bonds remain special, a function of repo plays" before Treasury's refunding sales of 10-year and 30-year bonds on Wednesday and Thursday, respectively, she said. Overseas, bank-to-bank lending rates inched down and were expected to grind lower after the European Central Bank last week fueled expectations of further interest rate cuts and more non-conventional policy measures.

ECB President Mario Draghi said the bank's policymakers discussed cutting interest rates at their meeting last Thursday but decided the time was not right. Draghi's comments increased expectations the bank could cut its main refinancing rate from its current record low of 0.75 percent, but also tempered expectations of the ECB starting to charge banks for depositing funds with it overnight. Three-month Euribor rates, traditionally the main gauge of unsecured bank-to-bank lending, eased on Tuesday to 0.370 percent from 0.374 percent.

However, investors' immediate focus after last week's meeting was the prospect of the ECB resuming purchases of Spanish and Italian government bonds, if the countries activated the euro zone's rescue funds, to lower borrowing costs. Since Draghi said on July 26 he would do whatever was necessary to preserve the euro, Italian one-year bill yields have halved to 2.38 percent while their Spanish equivalents have dropped some 150 basis points to 3.17 percent. Draghi pared expectations of a further cut in the deposit rate paid to banks on cash parked at the ECB overnight. The deposit rate has recently tracked 75 basis points below the refinancing rate so another cut would push it into negative territory. The overnight Eonia rate is still seen falling from its current 11 basis points to around 3 basis points by the end of the year, according to forward prices. The ECB hopes the unprecedented move in the deposit rate to zero will boost interbank lending by forcing banks to look for more profitable options, but so far, institutions are mainly leaving the money in their current accounts at the ECB.