Money markets repo rates dip in fed rate cut speculation

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repurchase agreements fell for a second day on Wednesday as investors mulled whether the Federal Reserve might eventually follow the European Central Bank and cut the interest it pays on excess reserves. The rate on repos secured by Treasuries was last quoted at 21 basis points, down from 27 on Monday, and the lowest since June 19. The rate has dipped amid some speculation the Fed may eventually cut the interest rate it pays on excess reserves to banks (IOER). The speculation was spurred after the ECB on July 5 cut to zero the deposit rate it pays banks for parking money with it overnight."Because of the uncertainty over IOER, if you are an asset manager and you are taking money out of other markets you are probably going to put that into overnight repo, so it is going to drive the rate lower," said Thomas Simons, money market economist with Jefferies & Co in New York. The IOER currently stands at 0.25 percent. Some investors believe the Fed might reduce the rate in order to encourage other types of lending and possibly prop up economic growth.

Fed Chairman Ben Bernanke, in testimony before the Senate Banking Committee on Tuesday and Wednesday, offered few new clues on whether the U.S. central bank was moving closer to a fresh round of monetary stimulus, but repeated the Fed's pledge to act if needed. Meanwhile euro zone bank-to-bank lending rates fell to all-time lows on Wednesday, driven down by record low ECB interest rates and the decision to stop paying interest on money deposited at the central bank overnight. The ECB's overnight deposit rate of zero acts as a floor for money market rates because banks lend to rivals only if they are able to earn a better rate of interest than at the central bank.

The ECB hopes its unprecedented move, which means banks now get nothing if they park their spare cash there, will nurture a return to more significant interbank lending by forcing banks to look for more profitable options. Although some money market experts fear the cut could backfire and kill off parts of the market, the move, plus a growing belief the ECB could continue to cut rates, has had an immediate impact on bank-to-bank rates. Three-month Euribor rates, traditionally the main gauge of unsecured bank-to-bank lending, hit an all-time low of 0.464 percent on Wednesday, down from 0.470 percent. The equivalent Libor rate, also at a record low, fell by 1 basis point to 0.34464 percent. Libor is set by a smaller panel of London-based banks.

Overnight rates bucked the trend rising to 0.119 percent from 0.114 percent. However, they remain 20 basis points below where they were before the ECB cut rates. Dollar-priced three-month bank-to-bank Euribor lending rates fixed lower at 0.919 percent, while overnight dollar rates dipped to 0.33857 percent from 0.33929 percent. Euribor rates, like counterpart Libor bank-to-bank rates , are currently under investigation after it emerged a number of banks were falsely submitting the Libor rates they pay. Banks transferred almost half a trillion euros from the ECB's deposit facility to their current accounts at the central bank when its zero deposit rate came into force last week. But with the monthly reserves cycle now in its stride and fewer options available for banks to juggle their funding, the money has now started to trickle back again. A total of 382 billion euros was parked in the ECB's deposit facility overnight. Moving in the other direction, the amounts in banks' current accounts dipped to 490.8 billion euros.