MONEY MARKETS-U.S. rates futures fall after ISM surprise

* U.S. rates futures fall as traders rethink rate hike

* Benchmark euro/dollar Libor rates steady

* ECB expected to extend unlimited liquidity provision

* Strong demand at U.S. cash management bill auction
(Updates U.S. action, changes dateline, previous LONDON)

By Richard Leong

NEW YORK, Sept 1 (BestGrowthStock) – U.S. short-term interest rate
futures fell on Wednesday as an unexpectedly strong reading of
U.S. manufacturing made traders reconsider the chances of the
Federal Reserve hiking interest rates in 2011.

The recent wave of dismal economic data had fanned fears of
deflation and/or double-dip recession. Various regional indexes
had signaled even the manufacturing sector, which has been the
lone bright spot in the uneven U.S. recovery, was fading.

So it stunned traders betting on rates falling further that
the Institute for Supply Management index on national factory
activity showed faster expansion in August instead of an
expected deceleration. For more see [ID:nN01115648].

“The market seems quite surprised by this (ISM) number,”
said Lee Olver, managing director of fixed income strategies
with MountainView Securities in Houston.

“Everyone was on the same trade and everyone was trying to
get out at the same time too. This is what you see happening,”
Lee said of Wednesday’s sell-off in rates and bond markets.

Prior to the release of the ISM report, overseas data
showed stronger-than-expected economic activity in China and
Australia, easing fears over a global economic contraction,
analysts said.

Federal funds futures for 2011 delivery implied traders
were pricing in a greater likelihood that the Fed will raise
rates by the end of next year.

They (FFZ1: ) suggested an average fed funds rate of 0.46
percentage point by the end of 2011, compared with Fed’s
current target range of zero to 0.25 percentage point.

OTHER SHORT RATES STEADY

In other areas of the rates market, euro and dollar
interbank lending rates were steady a day ahead of a European
Central Bank meeting which is expected to result in the
approval of unlimited funds to banks at least until year-end.

With parts of the euro zone banking system still heavily
reliant on the ECB for liquidity, such a move would extend the
current promise of mid-October for the central bank’s main
weekly one-week operations and beyond September for three-month
loans. [ID:nLDE6420RY]

Benchmark three-month euro Libor rates (EUR3MFSR=: ) were
unchanged at 0.83 percent, with the spread over overnight
indexed swap rates — another stress indicator — at 32 basis
points up from around 27 basis points at the start of August.

“Indicators of stress are rising but that’s more to do with
a reassessment of the outlook rather than a spike in funding
strains,” said Eoin O’Callaghan, market economist at BNP
Paribas in London.

Three-month dollar Libor rates (USD3MFSR=: ) were also
unchanged at 0.29563 percent but three-month sterling Libor
(GBP3MFSR=: ) edged up to 0.72609 percent. [ID:nEAP000042]

The immense appetite for safety and liquidity was also
evident in the U.S. Treasury bill market.

The Treasury Department auctioned $25 billion in 56-day
cash market bills at a high rate of 0.125 percent, down from
0.140 percent last week. [ID:nTAR000291

The auction’s bid-to-cover ratio, a gauge of overall
demand, came in at 4.92, up from 4.65 the prior week.
(Additional reporting by Kirsten Donovan in London; Editing by
James Dalgleish)

MONEY MARKETS-U.S. rates futures fall after ISM surprise