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MONEY MARKETS-Mixed signals on U.S. rates before payrolls
April 5, 2012 / 7:47 PM / in 6 years

MONEY MARKETS-Mixed signals on U.S. rates before payrolls

* Cash dollar funding rates steady to higher

* Deferred U.S. interest rates futures rise

* Payroll data may reinforce view of no QE3 soon

By Richard Leong

NEW YORK, April 5 (Reuters) - The short-term U.S. interest rates market sent conflicting signals on Thursday on traders’ views on the direction of borrowing costs and Federal Reserve policy in advance of Friday’s government payroll report.

The increase in the interest rates on repurchase agreements (repos) and federal funds, as well as a drop in nearby interest rates futures on Thursday, suggested some nervousness that stronger-than-expected jobs data would further reduce the urgency for the Fed to embark on a third round of large-scale bond purchase, known as QE3, in a move to stimulate the U.S. economy, analysts and traders said.

“It’s the possibility of no more stimulus,” said Todd Colvin, senior vice president of global institution sales at R.J. O‘Brien and Associates in Chicago.

Ultra short-term dollar funding costs also edged up as Wall Street dealers scrambled to finance the Treasuries debt they bought at last week’s auctions before a holiday weekend.

More supply is on the way. The U.S. Treasury Department said on Thursday it will sell $66 billion in longer-dated government debt next week.

“It’s cost more for them to finance them,” Colvin said.

The U.S. bond market will close early at noon (1600 GMT) on Friday ahead of the Easter holiday.

On the other hand, latter fed funds and Eurodollar futures beyond late 2013 rose on some traders betting that the central bank would implement more measures to support U.S. growth, which remains sluggish due to high unemployment and a fragile housing market, traders said.

The grab for these deferred contracts was also due partly to some traders who see more value in them than the nearby contracts since they gave up on the notion that QE3 would happen soon, analysts said.

“There is not an endless wall of cash at the front end of the curve,” said Aaron Kohli, an interest rate strategist at BNP Paribas in New York.

The Fed’s minutes on its March policy meeting, released on Tuesday, showed most policy-makers were still worried about the economy, but suggested fewer of them wanted the Fed to enact more stimulus soon.

Friday’s payrolls data could reinforce that view on the Fed if the payroll data come in stronger than expected.

The median forecast on the March U.S. payroll figure is for a 203,000 increase, while the consensus reading on the March jobless rate is 8.3 percent, according to 72 economists recently polled by Reuters.

The U.S. Labor Department will release its nonfarm payroll survey at 8:30 a.m. (1230 GMT) on Friday.

In repo trading, which is what banks and bond dealers charge each other for overnight loans secured by Treasuries, the overnight rate was last quoted at 0.26 percent mid-market, up from 0.23 percent from late Wednesday.

In the fed funds market, whose rates the Fed monitors closely, the cost for banks to borrow excess reserves from each other overnight was last bid at 0.15 percent, unchanged for a second day.

In the futures market, fed funds futures for delivery through April 2013 closed unchanged to 0.5 basis point lower, while those for delivery beyond April 2013 finished up 0.5 basis point to 4.0 basis points.

Eurodollar futures through June 2013 ended mostly down 1.0 basis point to 1.5 basis points. Those contracts beyond June 2013 closed 0.5 basis point to 9.0 basis points higher.

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