Rates futures rise on bargain-hunting

By Richard Leong

NEW YORK (BestGrowthStock) – U.S. short-term interest rates futures climbed for a second straight day on Friday, as bargain-minded traders helped to stabilize a market battered by a dramatic sell-off.

Moody’s dramatic downgrade of Ireland’s credit rating elevated anxiety over Europe’s debt crisis and its impact on the banking system and the global economy. This supported those traders who bet policy-makers will leave their rate targets ultra-low longer-than-previously thought, analysts said.

It is unclear how long this rebound in the interest rates futures and the broader bond market will last given Friday’s very light volume, they cautioned.

“The rates market has gotten very cheap. It has reached levels which are very attractive,” said Michael Chang, interest rate derivatives strategist at Credit Suisse in New York.

Eurodollar futures rose as much as 14 ticks midday Friday. The Dec 2012 contract was up 6.5 ticks at 98.165 after touching an intraday low of 97.97 on Thursday, which was its lowest level since late July.

This implied traders anticipate the reference cost for banks to borrow three-month dollars from each other could rise to 1.835 percent in two years, compared with Friday’s fixing at 0.30375 percent.

The rise in Eurodollar futures steadied short-dated dollar interest rate swaps, helping to curb the recent spike in corporate borrowing costs.

The risk premium on two-year swaps over Treasuries was last quoted at 23.75 basis points, compared with 23.50 basis points late on Thursday after tightening as much as 21.25 basis points in earlier trading.

Despite some stabilization, analysts said it is unlikely rates will fall back to their historically lows earlier this year, amid evidence of faster global growth and the broad view that Europe’s fiscal predicament will not kick off another global crisis.

“The growth outlook is better so they can’t get back to where they were,” Credit Suisse’s Chang said.

Jefferies & Co. said its 2011 outlook released late on Thursday that three-month dollar Libor would average 0.40 percent by the fourth quarter of 2011, 0.10 percentage point higher than Friday’s fixing.

Meanwhile, benchmark euro interbank lending rates nudged lower with the abundance of liquidity in the banking system expected to remain in place even after a large repayment is due to the European Central Bank next week.

Over 200 billion euros of 3- and 12-month funds expire on Thursday, with banks having the opportunity to roll the cash in to shorter-dated maturities, namely a three-month operation and a one-time 13-day tender that will cover the rest of the year.

The three-month euro Libor rates dipped to 0.94563 percent.

(Additional reporting by Kirsten Donovan in London)

(Editing by Theodore d’Afflisio)

Rates futures rise on bargain-hunting