MONEY MARKETS-Traders see U.S. Fed on hold until 2015

Tue Aug 28, 2012 3:28pm EDT

* Futures imply view on Fed prolonging low-rate pledge
    * US 1-month bill sale fetches highest rate since 2011
    * Dollar 3-month Libor hits lowest since October


    By Richard Leong
    NEW YORK, Aug 28 (Reuters) - Traders on Tuesday bet the
Federal Reserve will likely prolong its near-zero interest rate
policy into 2015 to go along with a possible quantitative easing
move in an effort to stimulate a sluggish U.S. economy.
    Traders are focused on Fed Chairman Ben Bernanke's speech on
Friday, in which they hope he will signal more stimulus in the
form of another bout of large-scale bond purchases, dubbed QE3.
    "The market has priced in a near-zero interest rate pledge
to June 2015," Anthony Valeri, fixed income strategist at LPL
Financial in San Diego, said on Tuesday.
    The Federal Open Market Committee, the central bank's
policy-setting group, will meet Sept. 12 to 13. 
    The Fed has implemented an array of unconventional policy
tools to help the U.S. economy since late 2008 in an attempt to
fight a recession exacerbated by the global financial crisis.
    Two years ago, Bernanke laid the groundwork for a second
round of quantitative easing in his Jackson Hole speech, which
eventually involved the Fed buying $600 billion worth of
long-dated Treasuries.
    "The expectations of the Fed doing QE3 is driving the entire
yield curve," said Rob Robis, head of fixed income macro
strategies at ING Investment Management in Atlanta.
    The yields on longer-dated Treasuries have fallen a quarter
percentage point since last week when they touched a three-month
high after the minutes of the FOMC's July 31-Aug. 1 meeting
showed policy-makers were prepared to deliver another round of
stimulus "fairly soon." 
    The reaction to the Fed minutes in money markets has been
somewhat muted since most short-term borrowing costs have been
locked in a zero to 0.25 percentage point range since December
2008 when the Fed adopted a near zero rate policy.
    The futures market suggested traders anticipate the central
bank would hold its target range on the federal funds rate that
it controls near zero into mid-2015, beyond its current guidance
of late 2014.
    The December 2014 fed funds contract last traded up 2
basis point on Tuesday at 99.675, its highest in more than three
weeks. 
    Other key dollar rates were mixed on the day.
    The overnight rate on repos, a key source of funding for
Wall Street where it uses Treasuries and other investments as
collateral in exchange for cash, was steady at 0.21 percent.
    The London interbank offered rate on three-month dollars
fell to 0.42275 percent, its lowest since late October 2011, due
partly to bets that European politicians and policy-makers will
come up with a bold program to tackle the region's festering
debt crisis. 
    The U.S. Treasury bill sector, however, weakened because of
light demand and a recent pickup in supply, analysts said.
    The U.S. Treasury Department sold $40 billion of new
one-month bills at an interest rate of 0.120
percent, the highest since March 2011.
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