Tom Sapio Comments: Safe Haven Bids Keep U.S. Rates Near Zero

December 20, 2011, Reuters

Investors scrambled to sock cash into low-risk U.S. Treasury and agency bills on Monday, keeping interest rates near zero, in a year-end bid to shield assets due to fears on the euro zone debt crisis.

Freddie Mac (FMCC.OB) sold $1 billion worth of one-month debt at zero interest rate. It was the fifth straight one-month bill auction at which investors demanded no interest payments.

The U.S. mortgage agency, which is backed by the federal government, received a record bid-to-cover of 11.65 for its ultra short-dated securities on Monday.

A spokesman for Freddie Mac said the level of bidding was the highest ever for any Freddie Mac bill maturity.

"There’s a general scarcity of safe-haven assets around the globe," said Tom Sapio, head of repo sales and trading at Cantor Fitzgerald in New York, adding that "maturities being traded are very short."

Since last spring, U.S. banks, corporate treasurers and money market funds have favored Treasury and agency bills as they have reduced holdings of euro zone bank debt. The move has driven up the costs for euro zone banks to borrow dollars and caused the European Central Bank to lend them cheap dollars.

The benchmark London interbank offered rate on three-month dollars rose for a seventh straight session to 0.56695 percent, the highest level since July 2009.

The ECB’s first three-year loan tender on Wednesday will be closely watched and is expected to receive heavy bids. This could ease some fears about a dollar crunch for euro zone banks at least temporarily, affording them time to sort out bad sovereign loans and to raise capital.

J.P. Morgan analysts said in a research report released late Friday they expect the three-year dollar auction would draw 350 billion to 450 billion euros.


The U.S. Treasury also fetched heavy demand for its bill offerings on Monday. It sold a combined $56 billion in three-month and six-month bills at interest rates near zero percent.

The Treasury will auction $30 billion in one-month or four-week bills at 11:30 a.m. on Tuesday.

In the "when-issued" market, traders expect these bills due on January 19 will be sold at a high rate of zero. This would be the third one-month T-bill auction in a row in which the Treasury would receive an interest-free, one-month loan from investors.

In the open market, interest rates on T-bills going out to early May were either at zero or in negative territory, signaling cash-heavy investors chasing a tight supply of perceived safe-haven investments, analysts and traders said.

"We are at year-end when there is a lot of money piled into the short-end," Cantor’s Sapio said.

Banks and trading firms have also lent into the repurchase market where some euro zone banks could obtain overnight to one-week dollar loans if they pledge Treasuries as collateral, analysts said.

The overnight repo rate traded mostly at 9 basis points on Monday, little changed from late Friday.

In addition to repos and Treasury and agency bills, companies have grown to rely more on banks to hold their cash.

For six straight quarters, non-financial firms have raised the amount of money held in banks by more than half a billion dollars, with much of that coming at the expense of money market funds, according to J.P. Morgan analysts.