* Money funds add euro zone debt for 1st time since April* Funds' euro zone debt holding still 62 pct below peak* French bank paper enjoys revival on fewer worriesBy Richard LeongNEW YORK, Feb 9 U.S. prime money funds increased their holdings of euro zone bank securities in January for the first time since April 2011, suggesting reduced fears about the euro zone debt crisis spiraling out of control, a bank research report said on Thursday. These ultra short-term funds, which are seen as alternatives to bank savings accounts, added $27 billion in euro zone bank paper last month, bringing their euro zone debt holdings to $181 billion, a J. P. Morgan report showed. U.S. money funds had been a major source of cash for euro zone banks prior to a flare-up of the region's debt crisis last spring. Their tiptoe back into the region is a sign that there might be some stability in funding for euro zone banks, which have relied heavily on the European Central Bank for funding."It's not a big number, but we might have marked a turn here," said Alex Roever, short-term fixed income strategist at J. P. Morgan Securities in New York, who headed the group that published the report.
U.S. prime money funds can invest in securities besides U.S. government debt. They had combined assets of $1.052 trillion at the end of January, accounting for roughly 40 percent of the money fund industry. Fears about a messy Greek default, together with the heavy debt loads of Italy and Spain, the euro zone's third- and fourth-biggest economies, caused a stampede out of euro zone debt by U.S. money funds last year. Their holdings of euro zone debt at the end of January was $298 billion, or 62 percent, less than the peak seen last May."It's a bit of a turning point, but it's probably not going to return to where it once was," Roever said.
Still, Thursday's news that Greek political leaders clinched a long-stalled deal on reforms and austerity measures to secure a second international bailout worth 130 billion euros ($170 billion) should support the notion that the crisis is contained for now. The latest Greek development could further support appetite for French bank paper among U.S. money funds, which increased their French bank debt positions by $23 billion to $55 billon at the end of January. This was still $186 billion below the peak seen in May 2011, according to Roever. France has a bigger exposure to Greece than any other euro zone nation. French banks had about $56 billion worth of Greek debt at the end of June 2011, according to data from the Bank for International Settlements. January's increase in French bank debt among money funds was largely in very short-term securities in the form of repurchase agreements secured mostly by U.S. government securities, Roever said.
Money funds held $28 billion in repos with French banks, or roughly half of their collective debt holdings. In the meantime, money funds slightly pared their holdings of bank paper from outside Europe in January. Those holdings slipped $3 billion to $553 billion.
The borrowing cost on a key source of overnight loans for Wall Street fell to a five-week low from a near three-month peak in volatile trading on Friday. Uncertain outcome on the negotiations between Greece and its creditors before a debt repayment due next week sparked an early scramble among some banks and dealers to finance their trades and loans through the $5 trillion repurchase agreement market, analysts said. As hopes emerged that Greece may clinch a debt deal as early as this weekend, some cash investors stepped up their repo lending, pushing rates to the single digits, they said.
"These days, traders will finance that collateral in the morning and bid on the cash in the afternoon as a separate trade. Repo traders are now matching trades to minimize as much risk and charges as possible," Scott Skyrm, managing director at Wedbush Securities, wrote in a research note. In the repo market, banks and dealers pledge Treasuries and other securities as collateral to money market funds and other investors in exchange for cash.
As the end of a quarter approaches, cash investors tend to reduce repo lending and shift money into safer products such as Treasury bills and the Federal Reserve's term fixed-rate reverse repurchase agreements. Banks and dealers end up paying higher repo rates as quarter-end approaches as fewer investors are willing to lend.
Since last week, Greece's protracted wrangling with its creditors has complicated this quarter-end repo activity, analysts said. The interest rate on over-the-weekend repurchase agreements was last quoted at 0.03 to 0.07 percent, which was the lowest range in five weeks. It was bid as high as 0.28 percent earlier Friday, according to ICAP. The overnight repo rate was 0.28 percent late Thursday, which was highest close since March 31.
* U.S. dealers seek funding for Treasuries settlement* Investors move back to stocks, less cash to lend* Deferred Eurodollars fall, front months steadyBy Richard LeongNEW YORK, June 29 A key borrowing cost for Wall Street banks rose on Friday as they sought funds to pay their purchases at this week's U.S. Treasury debt auctions that raised $99 billion for the federal government. The supply of dollars in the $1.6 trillion tri-party repurchase agreement market -- where Wall Street banks pledge U.S. Treasuries and other assets as collateral in exchange for cash -- shrank as investors moved money back into the stock market and other riskier investments after European leaders took further steps to manage their region's fiscal mess."The market was surprised since everyone seemed to be at odds heading into the summit," said Mike Lin, director of U.S. funding at TD Securities in New York. Euro zone leaders struck a deal on Friday to allow their rescue fund infuse cash directly into struggling banks from next year and intervene on bond markets to support troubled member states. The interest rate on repos due on Monday was last bid at 0.24 percent, 2 basis points higher than Thursday and up 13 basis points at the end of the first quarter."There is just a lot of collateral around at the end of the quarter and there is less money to fund them," Lin said.
Some of the cash was channeled into stocks on Friday. The three Wall Street indexes were up nearly 2 percent in midday trading. Primary dealers, those top Wall Street firms that do business directly with the U.S. Federal Reserve bought more than half of the two-year, five-year and seven-year debt at this week's U.S. Treasury auctions. Dealers and other investors who bought the bonds must pay the U.S. Treasury on Monday. During the course of reselling their purchases in the open market, primary dealers typically seek funding for their Treasuries positions. The quarter's steady rise in repo rates stemmed from the growing supply of short-term U.S. Treasury debt in the open market due to the Fed's Operation Twist.
Under Operation Twist, these Wall Street firms must bid on the short-dated Treasuries that the Fed sells for this bond program. The Fed in turn has used the proceeds to buy long-dated Treasuries with the goal to lower mortgage rates and other longer-term borrowing costs. In addition to a general rise in short-term interest rates, primary dealers are stuck with more short-dated debt supply. As of June 20, they owned $96.7 billion in Treasuries, of which $60.2 billion are in coupon debt that matures in three years or less, according to the latest Fed data available. At the start of Operation Twist which began last October, they held a combined $11.9 billion in Treasuries. Primary dealers had $4.8 billion in net short positions in coupon debt that matures in three years or less.
Last week, the Fed extended Twist, which was initially scheduled to expire on Friday, into year-end with planned purchases of $267 billion long-dated debt. This is on top of $400 billion it already bought. MIXED SIGNALS Other parts of the dollar funding market suggested lingering concerns about the banking system due to the sovereign debt problem in Europe and signs of slowing global economic growth, analysts said. Eurodollar futures for delivery after 2013 fell anywhere from 1.0 to 8.5 basis points on Friday, although most front-month contracts were unchanged to up 1.5 basis points. The steadiness in front-month Eurodollar futures helped narrow the risk premium on two-year interest rate swaps over Treasuries by 0.25 basis points to 24.25 basis points. Two-year swap spread, which is seen as a gauge on investor confidence, ended essentially unchanged in second quarter after flirting with 38.00 basis points in early June on fears over Spain's troubled banks and Greece's possible exit from the euro zone. In offshore dollar lending, the London interbank rate on three-month dollars was unchanged at 0.46060 percent. This rate benchmark for $370 trillion of financial products worldwide was down from 0.46815 percent at the end of March.
Islamic banks in Oman are building a counterparty network for wakala, a sharia-compliant agency agreement, to use as a major tool for their interbank funding needs. A viable wakala market could help Omani banks' profitability and, if it is imitated elsewhere in the Gulf, challenge the dominance of commodity murabaha, a cost-plus-profit arrangement that is popular in other countries. Last week, a bilateral wakala agreement was signed between Bank Nizwa, Oman's first full-fledged Islamic bank, and the Islamic unit of Bank Sohar which allows the lenders to place surplus funds with each other. Bank Nizwa is in the process of signing similar agreements with other banks in Oman, which would help to create a formal network enabling Islamic money markets to function, chief executive Jamil Al Jaroudi told Reuters."If and when this happens, the volume of transactions would be representative of the size of the Islamic money market in Oman.
"Using the concept of wakala as an interbank instrument is new to Oman and perhaps quite new in some other markets too, especially those which have traditionally relied upon commodity murabaha," Jaroudi added. In wakala, one party acts as agent (wakil) for another; in wakala sukuk, for example, certificates are issued by an originator to buy specific assets, which in turn are given to a wakil for management, who charges an agency fee which can include a performance fee. The originator undertakes to buy the assets at maturity at an agreed price.
In the Gulf, use of wakala is dwarfed by the more-established commodity murabaha, in which a financial institution agrees to purchase merchandise for a client and the client promises to buy it from the institution at an agreed mark-up. Commodity murabaha faces criticism from within the industry for not being sufficiently based on real economic activity, a key principle in Islamic finance. In December, as Oman became the last country in the six-member Gulf Cooperation Council to adopt Islamic finance, it issued regulations which banned commodity murabaha. By removing an interbank tool available to Oman's Islamic banks, the ban threatened to make their liquidity management more difficult.
In April, Oman's central bank granted Islamic banks a one-year relaxation of rules on the amount of foreign assets which they can hold, to give more time for Islamic financial instruments to be developed domestically. While future wakala volumes are difficult to estimate, the network would include non-Omani lenders, said Mohammad Haris, head of Islamic banking at the Islamic unit of Bank Sohar."Sohar Islamic does intend to sign similar wakala agreements with Islamic banking institutions both locally and outside Oman. We have already signed master wakala agreements with many Islamic windows and banks."In June, a standard wakala contract template was launched by the Bahrain-based International Islamic Financial Market, a non-profit industry body which develops specifications for Islamic finance contracts.