Money Rates Falling on Switch From European Banks, Belton Says: Tom Keene

http://www.bloomberg.com/news/2011-07-07/money-rates-falling-on-switch-from-european-banks-belton-says-tom-keene.html

Cash inflows from U.S. money market funds as they reduce investments in European banks is driving short-term interest rates lower, according to JPMorgan Chase & Co.’s Terry Belton.

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THIS MAKES ALL THOSE PEOPLE LOOK LIKE FOOLS WHO HAVE BEN SAYING THAT RATES WILL SPIKE UP HIGHER AND WE WILL SEE HYPER INFLATION

RATES ARE GOING DOWN

THIS IS A CLEAR SIGN OF A DEFLATIONARY TREND

PEOPLE ARE HAPPY TO KEEP MONEY AT LOW RATES

THIS IS SAYING THAT THEY ARE FLEEING TO CASH AND CASH EQUIVALENTS

I  V SAID THAT CASH AND SHORT TERM US T BILLS WILL BE THE BEST PLACE  TO BE WHEN THIS DEFLATIONARY HURRICANE HITS US IN THE NEXT 5 YEARS

“One of the sources of funding for European banks -- not peripheralEurope, but core Europe, banks in France and Germany -- are the U.S. money funds,” Belton, the firm’s global head of fixed-income and foreign-exchange research, said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “As the markets become concerned around Europe, they pull back a bit.”

The one-month Treasury bill rate fell below zero last week for the first time since January 2010 as investors sought safety. It touched negative 0.0101 percent today before trading at 0.0152 percent, according to Bloomberg Bond Trader data. The rate rose to as high as 0.1562 percent this year on Jan. 20.

“Institutional money is leaving the prime money funds and going into the Treasury market, into the short-term bills and repo,” New York-based Belton said. “That is pushing those rates lower.”

The 10 largest U.S. prime money market funds have about half their assets invested in securities issued by European banks, Fitch Ratings estimated in a June 21 report. Prime money funds typically invest in commercial paper, bank certificates of deposit and floating-rate notes issued by private firms.

Record Premium

The extra yield investors demand to hold Portugal’s 10-year bonds over German bunds surged this week to a euro-era record 10.13 percentage points after Moody’s Investors Service cut the Iberian nation’s credit rating to Ba2 on July 5, below investment grade. The yield on Italy’s 10-year bond reached 5.19 percent, the highest level in three years.

While Greek Prime Minister George Papandreou last week won lawmakers’ approval of a 78 billion-euro ($111 billion) austerity package needed to qualify for further financial aid from the European Union, the region’s leaders are still at odds over how to tackle the debt crisis.

Negative Treasury bill rates mean investors are willing to pay the government to hold their money, protecting them from the potential losses of other investments.

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THIS IS HAPPENING NOW

THOSE WHO TALK ABT RECOVERY SHOULD LOOK AT THIS
HOW DO YOU EXPLAIN NEGATIVE RATES

THERE IS FEAR BUILDING UP

Current money-market conditions are “nothing like the stress level in 2007,” added Belton in the interview.

“That was a much more serious global banking crisis, with banks undercapitalized,” Belton said. “But it could get that way. What needs to happen is that the EU really needs to provide the next round of funding to Greece. If that happens, which we expect it will, then Europe will become more of a back-burner issue.”

Negative Average

The average rate for borrowing and lending Treasuries for one day in the repurchase agreement market was negative last week, at minus 0.005 percent on June 29, according to index data provided by the Depository Trust & Clearing Corp. That was the first time the index was negative. The DTCC provides data through July 2010 on its website. The rate was 0.009 percent yesterday, down from 0.101 percent at the start of the quarter.

The DTCC index is a weighted average of all general- collateral repo transactions during a day. The DTCC processes about $3.6 trillion in repos transactions daily.

Overnight general collateral repo rates traded today at 0.1 percent, according to ICAP Plc, the world’s largest inter-dealer broker. That’s down from the about a quarter of a percentage point rate that held at the start of the year.

Securities dealers use repos to finance holdings and increase leverage.

“We have overnight and short-term rates in Treasuries trading near zero, as there is too much money flowing into Treasuries and flowing away from the European dollar markets,” Belton said. His fixed-income research group was No. 1 last year in Institutional Investor magazine’s poll of U.S. money managers.

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THIS IS GOING TO CONTINUE TO HAPPEN

USD WILL BE STRONG