Bloomberg writes "No relief as shrinking repo leaves bonds exposed", which says, "While the biggest part of the market for repurchase agreements has decreased 18.5 percent over the past two years, banks aren't yet done complying with regulations that are forcing them to cut back in this area, say analysts at firms from Citigroup to Nomura Holdings. Dealers and investors report seeing declines in liquidity in times of market stress, including wider gaps between bid and offer prices and more difficulty in completing trades.... Securities dealers use repurchase, or repo, agreements to finance their holdings and leverage their potential gains. One party offers a security as collateral to borrow cash for a period as short as a day. Money-market mutual funds are among the biggest lenders of cash in those deals, using the agreements as safe, short-term liquid investments. The amount of securities financed through one part of the market known as tri-party repo fell to an average $1.64 trillion as of Dec. 9, from $1.96 trillion two years earlier, according to data compiled by the Federal Reserve from the primary dealers. The market's now a little more than half of the $2.8 trillion that was being financed daily during its peak in 2008, before the credit seizure that sent investors fleeing and caused the collapse of Lehman Brothers Holdings Inc." Bloomberg's piece adds, "While U.S. financial institutions have already taken significant steps in reducing their balance sheets to comply with capital requirements and the risk-curbing rules of the Dodd-Frank Act, banks overseas have further to go, said Andrew Hollenhorst, a fixed-income strategist at Citigroup in New York." Bloomberg's Businessweek also writes, "Fed Funds Rate Increase Path Expectations Tumble in Money Market." It comments, "Traders of money-market securities are slashing their expectations for the extent of Federal Reserve interest rate increases for the end of this year. Interest-rate derivatives predict the Fed's policy rate will rise to about 0.41 percent by the end December, about a third of the 1.125 percent rate central bank officials predicted in December.... Fed fund future contracts see a greater than 50 percent chance of the first central bank rate increase won't happen until the final quarter of 2015.... "Money markets have pushed out the timing of the start of the Fed's lift off," said Brian Smedley, an interest-rate strategist at Bank of America Corp. in New York. "Now it's looking at it taking place in the fourth quarter."" The piece add, "The federal funds futures market see overnight rates moving to 1.1 percent by the end of 2016, which compares to a 2.5 percent median estimate in the Fed's quarterly forecasts."

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