Money markets repo rates firm before us holiday

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* Repo general collateral rates high before holiday* ECB rate cut bets remain after EU summit outcome* Rate cut expectations based on weakening economyBy Ellen FreilichNEW YORK, July 3 Repo general collateral rates remained high o n T uesday before the Fourth of July Independence Day holiday following the previous day's settlement of last week's Treasury note auctions. Repo rates traded between 25 basis points and 27 basis points, said Roseanne Briggen, market analyst at IFR, a ThomsonReuters unit. A premium in three-, 10- and 30-year bonds was "linked to the usual repo play" at this juncture in the monthly Treasury auction cycle, she said. The last group of Treasury auctions just settled and terms of the next batch - re-opened auctions of 10- and 30-year Treasuries, and the sale of new three-year notes - will be announced on Thursday.

On Tuesday, the Treasury sold $30 billion in four-week bills at a high rate of 0.075 percent, awarding 6.93 percent of the bids at the high. The value of bids received over those accepted, the bid-cover ratio, was 4.65. Key euro zone bank-to-bank lending rates fell to their lowest level in more than two years as the view firmed that the European Central Bank would cut interest rates this week."The markets are assuming that the ECB will cut the refi rate 25 basis points this week, given the sharp drop in global manufacturing and German exports and inflation," said Kathy Jones, fixed-income strategist at Charles Schwab. "The only surprise would be if they didn't cut rates."The ECB meets on Thursday to decide on the euro zone's interest rates and 48 of 71 economists in a Reuters poll expect the bank to cut rates below the current record low of 1.0 percent.

A key question for short-term market interest rates is whether the bank will also cut its overnight deposit rate, now at 0.25 percent. The rate acts as a floor for money market rates and cutting it would give bank-to-bank rates further room to fall. Three-month Euribor rates, traditionally the main gauge of bank-to-bank lending, slipped to 0.650 percent from 0.652 percent, the lowest since April 2010. Other key rates also decreased. Six-month Euribor rates fell to 0.926 percent from 0.928 percent and shorter-term one week rates dipped to 0.319 percent from 0.321 percent.

Overnight rates fell to 0.329 percent from 0.382 percent after banks settled their end-of-quarter accounts. Dollar-priced three-month bank-to-bank Euribor lending rates edged up to 0.991 percent from 0.984 percent, while overnight dollar rates ticked up to 0.345 percent from 0.344 percent. ECB policymakers have given fresh hints in recent days that the bank could cut interest rates, a move that would open up room for a further drop in market rates."There is no doctrine that interest rates cannot fall below 1 percent," ECB Chief Economist Peter Praet said last week. High excess liquidity in the banking system - now at 798 billion euros, according to Reuters calculations - also puts downward pressure on market rates. The sharp fall in euro-priced interbank rates over the last half-year has brought benchmark euro-priced three-month rates to within touching distance of a record low of 0.634 percent hit in early 2010. Three-month Libor was set at 0.04606 percent, unchanged for the sixth consecutive session.