* Treasury yields up on US plan to issue more bills
* Upward pressure on Fed funds rates seen limited
* Malaysian swaps rise further, prepare for rate rise
By Vidya Ranganathan
SINGAPORE, Feb 24 (Reuters) - Short-term U.S. rates rose in Asia on Wednesday, extending the previous day's reaction to news that the U.S. government is resuming a financing program to help the Federal Reserve drain money from the banking system.
Fed funds futures <0#FF:> also edged lower even though market participants reckoned the renewal of the Treasury Supplementary Financing Program would not push money market rates higher [ID:nN23111208].
Asian local markets were relatively quieter, but that view
on U.S. rates led to a further drop in Korean interest rate
swaps
Malaysia remained an exception to that trend, with swaps there grinding even higher ahead of a central bank policy meeting next week.
With the central bank governor having spoken several times this year about the need for policy rates to be normalised, analysts have brought forward their expectations for the policy rate -- now at a record low of 2 percent -- to be raised much earlier in the year.
The one-year ringgit interest rate swap for instance has
risen 16 bps in two weeks and 34 bps in the past month to 2.64
percent
Yet, even though Bank Negara Governor Zeti Akhtar Aziz has said a normalisation in rates did not construe policy tightening, few expect a rate rise next week and some analysts found the run up in yields excessive.
"After climbing by nearly 30 bps in the past month, there is significant downside risk for front end rates going into this meeting - hence we would suggest taking some profits on outright paid positions and avoid adding further to flatteners for the time being," RBS strategist Woon Khien Chia said in a note.
U.S. SWAPS, FUTURES
In dollar funding markets, the eurodollar futures and fed funds futures <0#FF:> were a shade lower, and swaps a bit higher. The 2-year swap rate was one basis point higher at 1.1 percent, but after it had fallen 10 bps since last week.
The U.S. Treasury Department's revival of its $200 billion financing program will be through eight auctions of $25 billion 56-day bills, beginning on Wednesday.
Market participants speculated that the Treasury, by putting $200 billion of cash at the Fed, was facilitating completion of the Fed's program to purchase agency mortgage backed securities (MBS). The Fed's holdings of MBS totaled $1.026 trillion in the week ended Feb. 17 and it plans to have bought $1.25 trillion by the end of March.
Also, the planned sale of bills could bring down excess reserves banks have parked at the Fed, which at last count had crosses $1.2 trillion.
"If the Fed already has sufficient funds to complete their MBS program, what it gives them is some extra funding in case they decide they want to extend their buying," said Sean Keane, a director of Triple T Consulting and formerly a money markets trader at Credit Suisse.
"And the market is getting quite focused on what will happen to the long term mortgage rates once the Fed stops buying," Keane said.
Keane also felt that the Fed funds rate, stuck around the middle of the Fed's 0 to 0.25 percent policy range for nearly six months, would move up by a basis point or two, if at all.
Analysts at Barclays Capital said the re-introduction of the supplementary bills program was to expand the Fed's arsenal of tools to drain cash, so that less reverse repos and term deposits are required when the Fed begins policy tightening in earnest.
It did not seem intended to either drain a vast amount of reserves or to push front end rates higher, they wrote.
"Based on an estimated $800-1,000 billion in reserve draining, both reverse repos and term deposits programs will need to be large, potentially introducing significant distortions in short rate markets," Barclays said in the note. (editing by Kazunori Takada)