NEW YORK: Weekly sales of short-term US government debt drew solid demand on Monday, with bids topping market prices at the bidding deadline, while key euro zone lending rates fell to two-year lows and measures of counterparty risk stabilized.
The US Treasury sold $30 billion in three-month bills at a high rate of 0.085 percent and $27 billion in six-month bills at a high rate of 0.14 percent.
Yields on three- and six-month US debt remain very low, anchored by the Federal Reserve's near zero-percent interest-rate policy for the overnight federal funds rate, a formulation expected to persist until at least late 2014.
Even with low yields, the value of bids offered over those accepted, known as the bid-to-cover ratio, was 4.61 for the three-month bills and 4.97 for the six-month bills.
Dealers took 77.8 percent of the three-month bills and 73.5 percent of the six-month issue.
"The buyside largely stayed away again this week, but the (three-month bill) auction stopped 1/2 basis point short, the sixth week in a row when this occurred," said Thomas Simons, money market economist at Jefferies & Co. in New York.
When an auction stops "short," it means bids topped market prices at the bidding deadline, implying solid demand.
The 0.14 percent high rate for the six-month bills was also half a basis point short of where the issue traded at the deadline for bids.
EURO ZONE INTERBANK RATES HIT 2-YEAR LOWS
Key euro zone three-month bank-to-bank lending rates fell to two-year lows on Monday as the ECB's injections of three-year funding continued to influence money markets.
Three-month Euribor rates fell on Monday to 0.682 percent from 0.684 percent on Friday and six-month Euribor rates fell to 0.969 percent from 0.972 percent.
WAITING FOR THE ECB
Analysts said market players were waiting to see if the European Central Bank will signal further monetary stimulus at its policy meeting in June.
Next month's election in Greece is also in focus. If pro-bailout parties do not manage to win a majority, that would increase speculation the country would run out of money and eventually be forced out of the euro.
The three-month spread between Libor rates and overnight index swap rates - an indicator of financial stress - fell from 55 basis points to around 30 basis points between the beginning of March and early April as sentiment on the euro zone improved.
Since then, however, the spread has stopped shrinking. It has held at around 30 basis points for the past two months, as euro zone tensions resurfaced due to worries about Spain's finances and speculation Greece might leave the euro.
The ECB's two rounds of three-year financing carried out in December and February eased tensions in both money and sovereign debt markets at the beginning of 2012.
The excess liquidity helped take Euribor rates to two-year lows on Monday.
Analysts are concerned about the contagion risks from a Greek exit. If markets start to speculate that other peripheral countries could leave the currency bloc, it would make it more expensive for those nations to borrow in commercial markets.
Spain's banking system and its deteriorating fiscal position have been a worry for investors who are now demanding more than a 6 percent yield to hold 10-year Spanish debt.
The cost of insuring five-year Spanish debt against default has surged 54 basis points over the past month to 556 basis points. Credit default swaps on debt issued by Spanish bank BBVA have jumped 59 basis points to 491 basis points, and the equivalent for peer Santander rose 20 basis points to 436 basis points over the same period.
The premium charged to swap euros to dollars for two years eased to 72.5 basis points from 73.5 basis points on Friday, but remained up from around 60 basis points nearly two weeks ago and just below its highest level since mid-January.
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