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Money markets treasury bills to stay rangebound

Yields on Treasury bills will likely stay rangebound for the foreseeable future as markets shift their focus to longer-dated U.S. debt. Unless the Federal Reserve moves on interest in excess reserves, the government nears default as with last year's bruising debt ceiling talks or monetary policy expectations shift globally, bills will probably not budge much, said Ian Lyngen, senior government bond strategist at CRT Capital Group in Stamford, Connecticut."The short answer is I don't expect any of those things," he said. Bills "continue their rangebound trend as the bulk of the Treasury market's focus has been pushed out the curve."The idea of lowering the rate that the U.S. central bank pays banks for parking their reserves received some attention this summer as a way to encourage banks to lend more to businesses and individuals, boosting the economy. But the idea of cutting the interest on excess reserves has since faded.

In addition, last year's fight over raising the government's borrowing ceiling eventually brought the U.S. government to the brink of a debt default and cost the United States its top-tier, triple-A credit rating from Standard and Poor's. U.S. Treasury Secretary Timothy Geithner has already warned Republicans against a repeat of last summer's theatrics.

Monetary policymakers around the world are expected to keep up an accommodative stance as global growth worries persist. Yields on three-month bills traded at 0.091 percent on Thursday. Yields on six-month bills traded at 0.131 percent. In other short-term lending, the amount of seasonally adjusted U.S. commercial paper contracted for a fourth consecutive week in the week ended Sept. 26, Federal Reserve data showed on Thursday.

Non-seasonally adjusted commercial paper outstanding - which some analysts consider a more reliable reading than the seasonally adjusted one since it has been distorted by the financial crisis - declined as well. In unsecured lending, the London interbank offered rate, or Libor, on three-month dollars slid to 0.36025 percent, its lowest in about a year, from 0.36225 percent on Wednesday. The rate has sunk almost steadily for about three months, and is well off the 0.58100 percent at the end of last year. Britain is expected to propose on Friday that Libor, the interest rate at the center of a rigging scandal, be anchored to real transactions and that an industry body be stripped of its supervisory role, to restore trust in the benchmark.

Omani islamic lenders build interbank market with wakala

Islamic banks in Oman are building a counterparty network for wakala, a sharia-compliant agency agreement, to use as a major tool for their interbank funding needs. A viable wakala market could help Omani banks' profitability and, if it is imitated elsewhere in the Gulf, challenge the dominance of commodity murabaha, a cost-plus-profit arrangement that is popular in other countries. Last week, a bilateral wakala agreement was signed between Bank Nizwa, Oman's first full-fledged Islamic bank, and the Islamic unit of Bank Sohar which allows the lenders to place surplus funds with each other. Bank Nizwa is in the process of signing similar agreements with other banks in Oman, which would help to create a formal network enabling Islamic money markets to function, chief executive Jamil Al Jaroudi told Reuters."If and when this happens, the volume of transactions would be representative of the size of the Islamic money market in Oman.

"Using the concept of wakala as an interbank instrument is new to Oman and perhaps quite new in some other markets too, especially those which have traditionally relied upon commodity murabaha," Jaroudi added. In wakala, one party acts as agent (wakil) for another; in wakala sukuk, for example, certificates are issued by an originator to buy specific assets, which in turn are given to a wakil for management, who charges an agency fee which can include a performance fee. The originator undertakes to buy the assets at maturity at an agreed price.

In the Gulf, use of wakala is dwarfed by the more-established commodity murabaha, in which a financial institution agrees to purchase merchandise for a client and the client promises to buy it from the institution at an agreed mark-up. Commodity murabaha faces criticism from within the industry for not being sufficiently based on real economic activity, a key principle in Islamic finance. In December, as Oman became the last country in the six-member Gulf Cooperation Council to adopt Islamic finance, it issued regulations which banned commodity murabaha. By removing an interbank tool available to Oman's Islamic banks, the ban threatened to make their liquidity management more difficult.

In April, Oman's central bank granted Islamic banks a one-year relaxation of rules on the amount of foreign assets which they can hold, to give more time for Islamic financial instruments to be developed domestically. While future wakala volumes are difficult to estimate, the network would include non-Omani lenders, said Mohammad Haris, head of Islamic banking at the Islamic unit of Bank Sohar."Sohar Islamic does intend to sign similar wakala agreements with Islamic banking institutions both locally and outside Oman. We have already signed master wakala agreements with many Islamic windows and banks."In June, a standard wakala contract template was launched by the Bahrain-based International Islamic Financial Market, a non-profit industry body which develops specifications for Islamic finance contracts.

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