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Money markets higher repo rates cool demand at 4 week t bill auctions


* Tepid demand for U.S. Treasury four-week bills* Better returns available in the repo marketBy Ellen FreilichNEW YORK, March 20 A $40 billion Treasury sale of four-week bills drew the most tepid bidding in just over a month on Tuesday as better rates available in the repo market damped demand for bills offering less attractive returns. The value of bids offered over those accepted at this week's bill auction was 3.99, the lowest since Feb. 14. Dealers' bid was $2 billion smaller than a week earlier, yet they captured a portion of the sale that was $2 billion larger than last week's and amounted to 73.2 percent of the bills sold. Direct bidders took 10.9 percent of the bills, toward the lower end of the recent range."With repo rates ranging from the low teens to mid-20s, demand for 4-week bills yielding 10 basis points or less has been weak," said Thomas Simons, vice president and money market economist at Jefferies & Co in New York. Only investors who have to adjust the average duration of their portfolios "are participating in the auctions," he said. OVERNIGHT TREASURY REPO RATES HAVE CHEAPENED

Overnight Treasury repo rates have cheapened steadily all month and by late last week, the collateral had cheapened to more than 20 basis points and the repo rate was at its highest level since last summer's debt-ceiling crisis."Besides the temporary balance-sheet distortion at quarter-end, which will push repo rates lower, we expect collateral rates to stick near current levels until mid-April," said Barclays Capital market analyst Joseph Abate in New York. Abate said supply appeared to be driving that trend. Dealers' inventories of short coupons and bills climbed to over $80 billion in the first week of March, and dealers have also held "a respectably sized" long position in Treasuries maturing in more than 11 years, he said. Dealers' only short position is in the intermediate sector with Treasuries maturing in six to 11 years.

Abate said the "pile-up" of Treasuries on dealer balance sheets is linked to the Federal Reserve's "Operation Twist" transactions in which the Treasury sells shorter-dated maturities on its balance sheet and uses the proceeds to buy longer-dated Treasuries to keep long-term interest rates low."It takes time for dealers to re-distribute the short-dated paper to final buyers and meanwhile, the dealers need to finance these holdings in the repo market," Abate said. The normal seasonal rise in bill supply has also contributed to higher repo rates, analysts said. That factor should start to fade once the April 17 deadline for U.S. tax returns has passed.

As revenues arrive from taxpayers, the Treasury's need to raise short-term cash will decline and so will bill supply. The Treasury Borrowing Advisory Committee expects bill supply to contract by $120 billion in the second quarter."With (the Fed's) Operation Twist sales continuing through the end of June, we look for repo rates to remain heavy - but closer to 15 basis points," Abate said. One element of uncertainty is whether government-sponsored enterprises (GSEs) will soon return to the repo market."Since July 2011, GSEs have been leaving sizable balances in their deposit account at the Federal Reserve uninvested - generally over $40 billion, but in some weeks much more than that," Abate said. Since these balances are unremunerated, the GSEs have an incentive to invest their cash in the repo, bill, and to a much smaller extent, the (shrunken) fed funds market, he said. When repo rates were under 10 basis points last year, the reward for investing in these markets were probably too small to persuade the GSEs to accept counterparty risk instead of leaving their cash safely at the Fed, Abate said."But now that overnight collateral has cheapened to 20 basis points, the incentive for GSEs to invest in the repo, bill and fed funds markets may be stronger," he said."If GSEs reduce their balance at the Fed and push their cash into the repo market, collateral rates could richen," Abate said.

Newsmaker egypts new finance minister faces daunting task


* Inherits a budget deficit running at about 15 pct of GDP* Holds doctorate in economics from Boston University* Believes in regulated markets that encourage competitionBy Patrick WerrCAIRO, July 14 Egypt's new finance minister is a U.S.-educated economist who will need all his training to help pull his country out of an acute financial crisis aggravated by renewed political turmoil. Ahmed Galal, managing director of the Cairo-based Economic Research Forum since 2007 and for 18 years a researcher at the World Bank, said he had accepted the post of finance minister in the army-backed government of Prime Minister Hazem el-Beblawi. The budget deficit has widened dangerously over the last few months, pushing Egypt close to bankruptcy as it runs out of sources of finance. Economists say $12 billion in aid offered to Cairo by Gulf states last week will last only a few months unless new revenue is found or spending is slashed. Economists expect the budget deficit to have swollen to about 15 percent of gross domestic product in the financial year that ended on June 30.

Galal, Egypt's sixth finance minister in less than three years, will struggle to convince his angry compatriots to accept economic austerity after 30 months of political chaos that has pushed many of them into poverty. Those familiar with his academic work say it has focused not just on economic growth but on ensuring that the poor benefit."Dr Galal describes himself as an 'eclectic' economist. He has been a long and firm believer in the importance of inclusive growth and education in contributing to inclusion and competitiveness," said Amina Ghanem, a former deputy finance minister."Fiscal policy for him would not be a budget deficit number, it would be about growth, empowerment and human development," said Ghanem, who served under four finance ministers until shortly before Mohamed Mursi was elected president in mid-2012.

The army ousted Mursi, Egypt's first freely elected leader, on July 3 after millions of Egyptians poured into the streets to protest against the Islamist president and his government. Galal received a doctorate in economics from Boston University in 1986 after graduating in business administration from Cairo University. During his 18 years as an economist at the World Bank he concentrated on the Middle East and North Africa. He later headed two Cairo-based think-tanks, the Egyptian Center for Economic Studies and the Economic Research Forum.

MARKET ECONOMICS In a July 2011 ERF paper, Galal said competitive markets should be allowed to allocate resources, improve production and encourage innovation, but should be regulated to prevent anti-competitive behaviour and promote a more egalitarian society."Markets do not function in a vacuum and generally do not produce the best outcomes for society on their own," he wrote."Safeguards are necessary to protect consumers from exploitation and ensure that workers have the right to decent working conditions and fair pay."Galal took the last government of Hosni Mubarak, who was ousted in a popular uprising in early 2011, to task for carving out special deals to please its supporters, such as land allocations and large contracts."The model relied excessively on market forces, without effective measures to curb abuse of market power, prevent corruption or reduce extreme poverty," he wrote. Since the anti-Mubarak uprising, which drove away tourists and foreign investors, two of Egypt's main sources of foreign currency, the country has struggled to pay for imports.