Weak job report propels U.S. rates futures

By Richard Leong and Kirsten Donovan

NEW YORK/LONDON (Reuters) - U.S. short-term interest rates futures rose on Friday after a disappointing jobs report resulted in more bets that the Federal Reserve will leave rates near zero a long time in a bid to sustain economic growth.

Since the Fed's vow to stick with its ultra-easy policy stance on Wednesday, futures on eurodollars and federal funds posted a series of contract highs.

"The bids have been relentless," said Christian Cooper, an interest rate strategist at RBC Capital Markets in New York.

Surging futures on fed funds, or banks' overnight lending of their excess reserves, implied traders expect less likelihood of the Fed raising rates in the first half of 2010. Once it does start raising rates, the Fed is expected to do so slowly.

The July fed funds contract reached a contract high of 99.59 after the government said its jobless rate rose to a 26-1/2 year high of 10.2 percent.

This suggested traders had priced in a 64 percent chance that the Fed will begin to raise rates mid-2010, down from 100 percent two days ago.

OTHER DOLLAR RATES FALL

Interbank and other dollar benchmark rates declined, while risk premiums in money markets contracted on Friday.

The London interbank offered rate on three-month dollars fell for a fifth straight day to a fresh low of 0.27406 percent.

Dollar Libor spreads, gauges of short-term U.S. corporate borrowing costs, held near their recent tights.

The spread between three-month dollar Libor and three-month Overnight Indexed Swap rate -- the market's expected Fed policy rate -- was unchanged on the day at 13 basis points, while the gap between three-month Libor and three-month Treasury bills narrowed 1 basis point to 22 basis points.

In the interest rate swaps market, the spread on two-year interest rate swaps over Treasuries narrowed to 34.00 basis points from 35.25 basis points on Thursday.

EURO, STERLING RATES UP

Equivalent rates on euro and sterling climbed on some disappointment to the adjustments the European Central Bank and Bank of England made to their liquidity measures.

The three-month euro Libor rates nudged up to 0.67625 percent from Thursday, while three-month sterling Libor moved up to 0.60875 percent.