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US Fed says special loan auction was oversubscribed

The US Federal Reserve said on Wednesday that 93 lenders bid for a total of US$61.6 billion in a special auction aimed at improving financial market liquidity.

The central bank agreed to pump US$20 billion into the banking system in the special auction, so the bidding showed strong demand.

The interest rate for the special loans was 4.65 percent -- above the federal funds rate of 4.25 percent but below the 4.75 percent rate that the Fed offers from its "discount window."

The move was aimed at getting more credit flowing in the financial system without banks having to resort to the discount window, which sometimes carries a stigma by implying the bank is in difficulty.

The oversubscription and the interest rate are key gauges of the liquidity problems in financial markets, signalling how deeply financial institutions are in distress and how willing they are to pay for extra cash.

The loans from Monday's auction are for 28 days.

The rate for the Fed auction "was a bit higher than most people expected," said Brown Brothers Harriman analyst Marc Chandler.

Chandler described the demand as "a bit strong, but not necessarily a sign of distress, just a sign of demand for liquidity."

Jeoff Hall at Thomson IFR Markets, said the oversubscription "would be strong for a Treasury auction but it does not suggest a severe dislocation in funding needs. It doesn't seem nearly as well attended as the ECB's historic main [refinance] auction Tuesday."

Miller Tabak analyst Tony Crescenzi said that "in light of the injections, it could be said that the central banks are merely forming a bridge to a time when it is hoped that problems at the root of the short-term funding problem will begin to diminish."
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