Money markets: strong demand for US bill auctions

US sales of three- and six-month bills on Monday drew strong demand, evidence that investors expect short-term US interest rates to remain exceptionally low for at least the next half year. Short-term rates have been anchored by the Federal Reserve's near zero interest-rate policy, a stance the US central bank pledged again last week to keep in place for an extended period.
"Fed policy is still the dominant factor in the credit market," said Gary Thayer, chief macro strategist at Wells Fargo Advisors in St. Louis, Missouri. "The Fed last week said it would keep short-term rates exceptionally low for an extended period, and at the press conference after the Fed's policy meeting (Fed Chairman Ben), Bernanke said that could be for at least two or three meetings, so that means several months," Thayer said.
In a Dutch auction, the US Treasury sold $29 billion in three-month bills at a high rate of 0.05 percent. The ratio of bids received over those accepted was 4.75, higher than the year-to-date average for three-month bill sales of 4.47, said money market economists at Jefferies & Co.
Similarly, the Treasury also sold $27 billion in six-month bills at a high rate of 0.100 percent, with a bid-to-cover ratio of 4.94, higher than the year-to-date average of 4.60. "Yields have settled into a new range in the past three weeks," said Thomas Simons, money market economist at Jefferies & Co. "Repo rates have bounced from the post-April 1 lows, but have begun to drift lower again, pulling bill yields down."
A scarcity of general collateral in the repo market has been forcing repo rates lower, analysts said. The Treasury Department has been holding back slightly on short-term debt issuance to put off the date by which borrowing will reach its legal ceiling. Analysts have said the supply shortage in general collateral could continue into July or August, even if Congress raises the debt ceiling next month. In the six-month bill auction, indirect bidders took down 49.2 percent of the issue, the highest since December 27, but still close to the portion taken in auctions of the previous three weeks, Simons said.