Wednesday, September 17, 2008

Dealers scramble for Treasuries at Fed auctions

(Reuters) - Wall Street dealers scrambled for the Treasuries offered by the Federal Reserve in three auctions held on Wednesday, as a safe-haven stampede caused a scarcity of U.S. government debt in the open market.

Investors scoured for Treasuries, gold and other low-risk investments on escalating worries about the stability of the financial system and the safety of money market funds that own securities issued by troubled insurer American International Group and Lehman Brothers Holdings, which filed for bankruptcy on Monday.

"Treasuries are the obvious place to go. Everyone is very concerned about exposure to Lehman and AIG," said David Riley, director of portfolio strategies with Rydex Investments in Rockville, Maryland.

Dealers submitted record bids to borrow $35 billion of Treasury issues from the U.S. central bank for 28 days from the Fed's Term Securities Lending Facility, or TSLF.

Wednesday's bidding at this TSLF auction was so intense that dealers paid a record high rate of 3.00 percent, well above the minimum fee rate of 0.25 percent.

The Fed launched the TSLF program in March, one of the several lending measures it has implemented to address the credit crisis. It lets Wall Street firms exchange riskier assets for Treasuries. They, in turn, can use them to obtain short-term cash loans in the repurchase market, helping them shore up balance sheets that have been ripped to shreds by losses and write-downs tied to bad mortgage investments.

The bid-to-cover ratio at the 28-day TSLF auction, an indication of demand, was a record 2.04, according to analysts. This compared with a $75 billion TSLF auction last week, which garnered a bid-to-cover ratio of only 0.54.

An earlier TSLF auction on Wednesday fetched a bid-to-cover ratio of 1.84 in which dealers borrowed $35 billion in Treasuries from the Fed for 14 days.

The two TSLF auctions on Wednesday accepted Schedule 2 collateral that includes investment-grade corporate and municipal bonds, as well as asset-backed and mortgage-backed securities.

Meanwhile, dealers submitted $6.246 billion in bids so they can borrow $5.609 billion of Treasuries overnight at another Fed auction on Wednesday, the New York Federal Reserve said.
On Tuesday, Wall Street firms borrowed $15.850 billion in Treasury bills and notes overnight, but failed to return $2.203 billion worth on time, according to the New York Fed.

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