TREASURIES-Fall in Europe after rate cuts, eyes on Libor

Thu, Oct 9 2008, 09:09 GMT
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LONDON, Oct 9 (Reuters) - U.S. Treasuries retreated in Europe on Thursday as investor appetite for risk slowly started to improve after central banks around the world slashed interest rates in a coordinated bid to stem this week's panic in financial markets.

Treasuries were also hit as investors turned their sights towards the Treasury's funding needs, not only for the $700 billion bank bailout package but for the financing it is providing the Federal Reserve for its ballooning balance sheet.

The Treasury said on Wednesday it would auction $40 billion in reopened debt securities to meet rising borrowing needs and ease shortages in the market for Treasuries [ID:nN08527639].

Central banks, including the Fed, EC and Bank of England slashed rates 50 basis points in an attempt to restore some confidence to markets, while overnight Taiwan, Hong Kong and South Korea followed.

Meanwhile, the U.S. Treasury is also now mulling taking stakes in banks, the New York Times reported. Treasury Secretary Henry Paulson said on Wednesday he has the power to inject capital into the banking system. [ID:nSP27587].

For a wrap of Thursday's main events see [ID:nPEK54269].

At 0826 GMT, yields on two-year Treasury notes were 14 basis points higher at 1.704 percent, while 10-year paper was yielding 3.745 percent, 9 basis points more on the day. The December T-note future was 31/64 lower at 114-29/64.

Stock futures are pointing to a higher open on Wall Street, which is also likely to keep bonds under pressure, but markets are nervously eyeing the return of short sellers after a ban on the bearish bets came to an end at midnight [ID:nN08674239].

But the main focus is on interbank money markets. Investors are looking for the freeze in money markets to relent in what would be a first step to help stem the forced deleveraging that has slammed stocks, higher-yielding currencies and commodities.

"If the UK government is essentially offering a guarantee for unsecured obligations for major banks, Libor rates could drift significantly lower once the facility is up and running," Barclays Capital strategists said in a note.

"Couple this with the measures announced ... by the Fed with respect to purchasing commercial paper, and the high likelihood of another 50 basis point easing at the Fed meeting later this month, and Libor rates may quickly reverse their dramatic move higher seen in recent weeks."

The cost of borrowing overnight dollars at 3.6 percent remained significantly above the Federal Reserve's new 1.5 percent target rate, reflecting financial institutions' demand for greenbacks to cover dollar positions, exposure and fund dollar assets.

Meanwhile, three-month borrowing on interbank markets remained expensive across all currencies and actual lending beyond a week or two remained frozen.

All eyes are now on Thursday's fixing of London interbank offered rates (Libor) from the British Bankers Association, traders said, after the cost of borrowing overnight dollars jumped 140 basis points early on Wednesday, before the coordinated rate cuts. Keywords: MARKETS BONDS TREASURIES

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