MONEY MARKETS-Short bank lending rates steady to up slightly

By Ellen Freilich NEW YORK, Nov 12 (Reuters) - The U.S. commercial paper market, a vital source of short-term funding for daily operations at many companies. shrank for the second straight week, interrupting the expansion of the previous three months, Federal Reserve data showed on Thursday. While the commercial paper market can be a gauge of economic activity, technical factors and seasonal adjustments may have contributed to the recent setback, analysts said. For the week ended Nov. 11, the U.S. commercial paper market shrank $76.6 billion to $1.239 trillion outstanding from $1.315 trillion outstanding the previous week. U.S. asset-backed commercial paper fell to $510.3 billion outstanding in the latest week from $515.0 billion outstanding the previous week. Short-term interbank lending rates were steady to slightly up on Thursday, and analysts said shorter-dated money market rates might drift up toward year-end. Money market rates have fallen to record lows this year on rock-bottom official interest rates and vast injections of central bank liquidity, with policymakers assuring markets they are not ready yet to withdraw extraordinary stimulus measures. The Bank of England hinted on Wednesday it might add more stimulus.

Governor Mervyn King said the central bank was open-minded about pumping new money into the economy. For details see European Central Bank Governing Council Member Michael Bonello told Reuters on Thursday the bank would ensure pulling back its liquidity lifeline would not disrupt markets and that banks would have access to enough alternative funding as 12-month loans were phased out. In New York, three-month borrowing rates for U.S. banks eased to 0.2872 percent on Nov 12, according to ICAP's New York Funding Rate, versus the previous session's 0.2956 percent, ICAP said. That compared with a 3-month dollar-denominated London interbank offered rate last fixed at 0.2725 percent, a record low for the fourth straight session, according to the latest fixings by the British Bankers' Association. ICAP's one-month NYFR eased to 0.2350 percent versus the previous session's 0.2412 percent. That compared with a one-month dollar-denominated Libor rate last fixed at 0.23875 percent. Equivalent euro Libor rates were fixed slightly lower at 0.67125 pct from 0.67250 percent on Wednesday while sterling rates inched up to 0.61250 percent versus 0.61125 percent. for the latest Libor fixings. Some analysts saw some distortion in Libor ahead of the end of the year when banks tend to hoard as much short-term liquidity as possible as they square up their books. "Over the next five to six weeks it's about liquidity as the quarter- and year-end draw close," said Kenneth Broux, market economist at Lloyds TSB.

"That's going to be a bigger driver of the front end of the money market curve." The amount of cash that banks deposited overnight at the ECB rose, data showed on Thursday, up to 44.758 billion euros from 16.536 billion previously. (Additional reporting by John Parry, Walden Siew and Emelia Sithole-Matarise; Editing by Padraic Cassidy) Keywords: MARKETS MONEY COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved.

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