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MONEY MARKETS-U.S. rates futures again fall on Fed outlook
March 14, 2012 / 6:53 PM / 6 years ago

MONEY MARKETS-U.S. rates futures again fall on Fed outlook

* Deferred rates futures hit lowest levels in 2-1/2 months
    * Traders price in slim chances of rate hike in 2013 2nd qtr
    * Overnight repo, fed funds rates remain elevated


    By Richard Leong	
    NEW YORK, March 14 (Reuters) - U.S. short-term
interest rates futures fell for a second day on Wednesday as a
more optimistic outlook from the Federal Reserve caused some
traders to worry the U.S. central bank could raise rates earlier
than they had previously thought.	
    Much of the heavy selling in futures on interbank loan costs
was for 2003 delivery and beyond, even though the Fed affirmed
its pledge to hold short-term rates near zero until at least
late 2014.	
    These Eurodollar and federal funds contracts fell to their
lowest levels in about 2-1/2 months. 	
    December 2014 Eurodollar futures are down 22.5 basis
points since Monday's close and are on track for their biggest
two-day day drop since last June.	
     "There are some doubts on how long can the Fed keep
short-term rates this low. Now it's not that far off to talk
about a rate hike," said David Keeble, global head of interest
rates strategy at Credit Agricole Corporate & Investment Bank in
New York.	
    Fed futures suggest traders are pricing in minute chances
the Fed could raise rates in the second quarter of 2013,
after the Fed in its policy statement on Tuesday said it sees
"moderate" economic growth. A week ago, traders had priced in
nil shot of a rate hike.	
    At the same time, overnight costs to borrow dollars held at
elevated levels.	
    In the $1.6 trillion repurchase market, the interest rate
for banks and Wall Street dealers to obtain overnight loans was
quoted at 22 basis points, hovering at a six-week
high.	
    The cost for federal funds, which the Fed targets, was last
bid at 12 basis points, flat from Tuesday and at its highest
level in four weeks.	
    Some analysts downplayed the Fed statement as the catalyst
for the dramatic sell-off in the rates and bond markets in the
past 24 hours. 	
    They blamed the drop in rates futures and elevated cash
rates on the recent pickup in Treasury bill supply and improved
risk appetite among investors after last Friday's relatively
strong U.S. payrolls report.	
    Investor sentiment also got a boost after the Fed decided to
release the results of its latest bank stress test shortly after
 its policy statement, two days earlier than it had planned.	
    The Fed said 15 of the 19 U.S. banks tested could withstand
a financial shock that would see unemployment hit 13 percent and
housing prices drop 21 percent.	
    Investors welcomed the results as a sign of further recovery
in a banking system that was pummeled by the housing meltdown
and the ensuing global financial crisis. 	
    "We are on firmer footing. Look at the stress test results.
They are central to the growth story," Keeble said.

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