MONEY MARKETS-Betting the Fed won't hike rates until late 2014

Fri Jul 6, 2012 1:36pm EDT

* Short-term futures bet Fed won't hike rates until late 2014

* Repo stays elevated before Treasury auctions

* Libor dips again

* Euribor rates fall after ECB cuts rates to record low

By Ellen Freilich

NEW YORK, July 6 (Reuters) - Jobs data and monetary policy led to lower short-term interest rates o n F riday as subdued U.S. job growth prompted short-term futures traders to bet the Federal Reserve would not raise rates until late 2014 and European Central Bank rate cuts caused interbank lending rates to fall.

Futures traders increased bets the Fed would keep short-term interest rates near zero until the end of 2014 after the U.S. government reported non-farm payrolls expanded by just 80,000 jobs in June, not enough to bring down the country's high 8.2 percent unemployment rate.

Fed fund futures, tied to the overnight lending rate between banks, rose after the report, showing that traders foresaw a 55 percent chance the Fed would raise rates in October of 2014, and about the same chance it would do so in December 2014.

Euro zone bank-to-bank lending rates fell to record lows after the European Central Bank on Thursday cut the bloc's main interest rate to a historic low of 0.75 percent and its deposit rate to zero.

The ECB's overnight deposit rate acts as a floor for money market rates as banks only lend to rival banks if they can earn more interest than at the ECB.

Cutting the rate to zero was unprecedented and a move the ECB hopes will encourage more interbank lending, which could then allow increased lending to firms and households.

But analysts said zero rates might hamper money-market functioning as banks' operating costs could exceed short-term interest rates.

Moreover, some doubt whether a rate cut is enough to improve demand, especially in hard-hit southern Europe.

"If anything, (the ECB rate cut) has increased monetary divergence between the core and the periphery within the euro zone, which poses questions about the ability of fiscal policy to bridge the gap," said Lena Komileva of G+ Economics.

Three-month Libor, the London interbank offered rate, edged lower again - fixing 0.2 basis points down at 0.45760 percent.

Libor is supposed to be a neutral figure reflecting how much it costs a bank to borrow money. But it is currently at the center of a scandal in which banks are alleged to have manipulated the rate in order to give a rosier view of their health and viability as a borrower.

Three-month Euribor rates, traditionally the main gauge of bank-to-bank lending, fell the most on record, hitting an all-time low of 0.549 percent, down from 0.641 percent.

Other key rates experienced similar drops. Six-month Euribor rates fell to 0.831 percent from 0.920 percent. Shorter-term one week rates fell to 0.208 percent from 0.313 percent. Overnight rates, which do not yet factor in the benefit of the cut, inched down to 0.332 percent.

Euribor, involved in a scandal like that of Libor after it emerged that a number of banks manipulated the rates they submitted to the committee that aggregates the data , also moved lower.

Dollar-priced three-month bank-to-bank Euribor lending rates edged down to 0.991 percent from 0.996 percent. The overnight rates climbed to 0.344 percent.

General collateral rates remained elevated after closing in the high 20s in the previous session. They traded at similar levels on Friday before next week's Treasury auctions.

"Like the heat in the (U.S.) heartland, there is no relief from elevated repo funding," said Roseanne Briggen, market analyst at IFR, a ThomsonReuters unit. "Collateral is still sloshing around in search of a home."

Federal funds closed at 18 basis points on Thursday; the effective rate was 17 basis points. They last traded at 18 basis points on Friday.