Rate futures fall after above-forecast job gains

CHICAGO (Reuters) - Futures tied to short-term U.S. interest rates ticked down on Friday, as traders bet that a better-than-expected increase in jobs in November could mean the Federal Reserve eases up on its bond-buying stimulus program slightly earlier than expected.

Traders still see a first Fed overnight interest-rate hike in mid-2015, based on fed funds futures trading at CME Group Inc's Chicago Board of Trade.

But futures expiring in 2013 and 2014 fell, after a U.S. government report showed nonfarm employment increased by 146,000, suggesting traders are pricing in a slightly higher chance of an earlier rate hike.

The jobless rate fell to 7.7 percent, a four-year low, but only because people gave up looking for work -- a sign not of strength but of pessimism about the jobs outlook.

Rate futures contracts fall when traders move forward their expectations of when the Fed will hike rates.

The Fed has held its target for overnight bank-to-bank borrowing rates at near zero since December 2008 and says it plans to keep them there until at least mid-2015.

It also is buying $40 billion in mortgage-backed securities monthly in an open-ended program it says it will continue until there is substantial improvement in the labor market outlook. Next week Fed officials will meet to decide whether to boost that program after another effort at stimulus, the so-called Operation Twist program, expires at the end of the year.

"It doesn't remove the need for stimulus but might convince the Fed to opt for a smaller program," said Kathy Lien, managing director at BK Asset Management in New York.

Under Twist, the Fed buys $45 billion of long-term Treasuries each month, paid for with the sale of the same amount of short-term Treasuries.

Many economists expect the Fed to shift to outright purchases of Treasuries in the New Year to make up for the gap left when Twist lapses. Exactly how much to buy is likely to be a topic of debate at the December 11-12 Fed meeting.

(Reporting by Ann Saphir; Editing by W Simon)