Market expects Fed Funds rate to be cut to 5%

U.S. Three-Month Treasury Bill Yields Climb Most Since 2000
By Deborah Finestone and Elizabeth Stanton

Aug. 21 (Bloomberg) -- Yields on U.S. three-month Treasury bills climbed the most since 2000 as demand fell for the safest government securities.

Bill yields rose for the first day in six, after tumbling yesterday by the most since 1987. The Federal Reserve Bank of New York cut the fee bond dealers pay to borrow its Treasuries, in a bid to ease a shortage in the market for loans backed by the securities. Demand at the Treasury's sale today of $32 billion in four-week bills was the weakest since at least July 2001.

``The flight to safety may be diminishing a bit,'' said Holly Liss, a bond saleswoman in Chicago at Citigroup Global Markets Inc. ``We're seeing more calming of the market as T-bill rates come back to normal.''

The three-month bill yield climbed 0.48 percentage point to 3.57 percent at 4:28 p.m., rising for the first day since Aug. 13. The increase is the biggest since Dec. 26, 2000. Yields fell 0.66 percentage point yesterday, the most since the stock market crash of October 1987 as money-market funds dumped asset-backed commercial paper for the shortest-maturity government debt.

The Treasury today sold $32 billion of four-week bills, the largest amount since at least July 2001. The bills were sold at a high discount rate of 4.75 percent. The one-month bill yield fell as low as 1.272 percent yesterday, and was about 2.6 percent before the auction. In a sign of weak demand, the government received $1.11 in bids for each $1 sold, the lowest since at least July 2001.

Fed Cuts Fee
The New York Fed cut its so-called minimum fee rate to a record low 0.5 percent from 1 percent, saying in a statement that the move is ``temporary.''

``We are doing it to provide additional liquidity to the Treasury financing market,'' said Andrew Williams, a spokesman for the New York Fed. He said the rate was the lowest in the history of the program, which has existed in its current form since 1999. The New York Fed last lowered the fee rate on June 26, 2003, the day after policy makers cut their target overnight rate to a four-decade low of 1 percent.

The yield on the benchmark two-year note fell to a 23-month low today before Senate Banking Committee Chairman Christopher Christopher Dodd said Fed Chairman Ben S. Bernanke agreed to use ``all of the tools at his disposal'' to restore stability in financial markets roiled by the subprime mortgage crisis.

The senator addressed reporters after meeting with Bernanke and Treasury Secretary Henry Paulson in Washington today.

`Right Direction'
``The comment from Dodd and the decision from the Fed are all going in the right direction to bringing some calm back to the financing market,'' said Nicolas Beckmann, co-head of U.S. interest rates trading at BNP Paribas Securities Corp. in New York, one of the 21 primary securities dealers that trade with the Fed.

Two-year note yields fell 6 basis points to 4.02 percent. The price of the 4 5/8 percent security due in July 2009 rose about 1/8, or $1.25 per $1,000 face amount, to 101 3/32. The yield earlier touched the lowest since September 2005. The 10- year note yield declined 4 basis points to 4.59 percent.

``Bonds are in favor largely around anticipation the Fed will make some accommodation,'' said Kevin Giddis, head of fixed- income trading in Memphis, Tennessee, at Morgan Keegan Inc.

On Aug. 17, the central bank cut the rate it charges for direct loans to banks by 0.5 percentage point to 5.75 percent. It was the first reduction in borrowing costs between scheduled meetings since 2001. The central bank said in a statement that risks to the economy have risen ``appreciably.''

The Fed has kept its key monetary policy tool, the target for the overnight lending rate between banks, at 5.25 percent since June 2006.
Interest-rate futures show traders are betting the Fed will lower its overnight lending rate between banks this month. Traders see a 100 percent chance of a quarter-point cut to 5 percent, and a 51 percent chance of a half-point cut, according to the August futures contract.