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MONEY MARKETS-Short-term US yields low as policymakers could act

by on July 27, 2012 7:02 pm GMT
 

NEW YORK, July 27 |
Fri Jul 27, 2012 3:02pm EDT

(Reuters) – Short-term U.S. debt will
likely be rangebound in coming sessions on expectations that
global policymakers will keep interest rates low to help spur
sluggish economies and keep the euro zone intact.

European Central Bank President Mario Draghi is said to be
holding talks with other council members on new ECB measures,
according to Bloomberg.

The news sent riskier assets such as equities higher around
the world as analysts saw policymakers pushing to keep the
monetary union together even as the region’s debt crisis
threatens to engulf larger economies in the zone.

But prices on Treasury bills didn’t seem to react, with
3-month, 6-month and 1-year bills unchanged.

“The fact that the front end of the market is unwilling to
break its recent range is not that surprising,” said Ian Lyngen,
a senior government bond strategist with CRT Capital.

Any measures that Draghi might take would keep downward
pressure in front-end rates, Lyngen said.

Those measures could include another long-term refinancing
operation. In two previous operations, the ECB pumped about 1
trillion euros into the banking system.

Also said to be under consideration would be more bond
buying or another interest rate cut.

New steps from the U.S. Federal Reserve would likely result
in the same pressure on short-term rates. The FOMC meets next
week, and analysts have speculated that the bank could engage in
more easing at some point this year as the recovery in the U.S.
economy – the world’s largest – remains tepid.

Data on Friday showed that U.S. economic growth slowed in
the second quarter as consumers spent at their slowest pace in a
year.

As a result, Lyngen said, short-term yields could simply
trade sideways in coming sessions, with investors unwilling to
budge from the current low rates.

Three-month Treasury bills yielded 0.107 percent,
and six-month bills 0.147 percent. Both were
unchanged in price from Thursday.

Benchmark three-month dollar Libor slid to
0.44660 percent, its lowest level since early November.

In the derivatives market, the spread between the two-year
U.S. interest swap rate and two-year Treasuries
narrowed to 20.5 basis points, the narrowest in about a year,
suggesting traders see chances of more Fed stimulus would help
the banking system.

Two-year interest swaps are seen as a proxy for bank credit
risk.