Money markets repo rates fall as us launches review

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* U.S. requests data on holdings of 7-year note issue * 7-year repos near zero pct vs negative rates last week * Morgan Stanley has funding access despite rating worries * Morgan Stanley debt cost elevated; CDS down vs Monday By Richard Leong NEW YORK, Feb 28 The interest rate banks and dealers charge each other for overnight loans fell on Tuesday as the U.S. government launched a review of a severe shortage of a seven-year note issue in the repurchase market last week. That shortage, which repo traders call "specialness," led to a scramble for seven-year notes last week. It forced some traders who especially needed the seven-year note issue, due in January 2019, to pay more than 3 percent in interest to borrow it. The "specialness" partly fueled bids at a $29 billion auction of new seven-year notes last Thursday, analysts said. Since then, repo rates have fallen on easing demand for Treasuries. On Tuesday, the interest rate on overnight loans secured by any Treasury security was last quoted at 0.14 percent, down from 0.18 percent on Monday. The overnight repo rate on seven-year Treasuries was last quoted at zero, flat from late Monday and a far cry from last week's 3-plus percent rate. "It calmed down a lot since Monday. All is quiet with that (seven-year) issue," said Joe D'Angelo, head of money markets at Prudential Fixed Income in Newark, New Jersey, who oversees about $50 billion in assets. Analysts said there was scarcity in nearly all Treasury maturities last week in the repo market, which banks and dealers rely on for short-term cash. But the cost to borrow most maturities was far below that seen on the seven-year issue. While repo specialness occurs frequently due to supply and technical factors, it is rare for the government to investigate them. What caught the attention of the U.S. Treasury Department was likely because the specialness occurred with a recent seven-year note issue, analysts and investors said. "You usually don't have a short-base in 7-years," said Mary Beth Fisher, an interest rate strategist at BNP Paribas in New York. The U.S. Treasury said late Monday that investors who had large positions of seven-year notes due January 2019 must report their positions to the New York Federal Reserve on Friday. There has been market speculation that some traders amassed seven-year issues in the open market upon learning a hefty sum of seven-year Treasuries was pre-sold to a large investor which was unlikely to lend them out in the repo market. Rather than failing to deliver the seven-year notes to the investor before the settlement of last Thursday's auction, dealers paid dearly for them, even at a cost above the 3 percent penalty charge for failing to deliver the security to the buyer. MORGAN STANLEY Meanwhile, Morgan Stanley has continued to access funding in the repo market despite concerns about its credit ratings, traders and analysts said. The U.S. investment bank said in a filing with the U.S. Securities and Exchange Commission late Monday that it will have to post up to $6.52 billion in collateral to counterparties and clearinghouses if Moody's Investors Service were to cut its credit rating. On Feb 15, the rating agency said it will begin a review of Morgan Stanley and 16 other major banks and securities firms due to fragile funding conditions, tougher regulations and other issues. Morgan Stanley could still easily obtain overnight cash in the repo market, according to traders, even as the cost on longer-term debt has risen since Moody's initiated its ratings review nearly two weeks ago. In the open market, Morgan Stanley's one-year floating-rate notes were quoted at 200 to 300 basis points above the London interbank offered rate on Tuesday. In comparison, the bank's five-year debt was quoted at a spread above 400 basis points. In the credit default swap market, the cost to insure against a Morgan Stanley default in five years fell to 324 basis points, down from 337 basis points on Monday. Two weeks ago, it was 294 basis points, according to Markit. Morgan Stanley's five-year CDS price is still the highest among major U.S. banks. Goldman Sachs' five-year CDS price was 252 basis points on Tuesday, while J. P. Morgan's five-year CDS was 108 basis points, Markit said.

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