August 11, 2015 / 2:44 PM / in 2 years

MONEY MARKETS-Bets on U.S. rate hike fall after yuan devaluation

NEW YORK, Aug 11 (Reuters) - Traders pared bets that the U.S. Federal Reserve would raise interest rates this year after China devalued its currency in a bid to help its exports, adding disinflation pressure on the global economy.

U.S. short-term interest rates futures rose, while the expected policy rate in over-the-counter trading fell further from its highest level since June 2010 set last week.

The surprise 1.9 percent devaluation of the yuan was the latest measure the Chinese government has deployed to combat weakening economic growth and stock market turbulence.

While the devaluation was considered small, the move caused some traders to think what other efforts Beijing might use to bolster the world’s second largest economy.

“It’s signaling intention. What the market fears most is the unknown,” said David Keeble, global head of interest rates strategy at Credit Agricole Corporate & Investment Bank in New York.

Stock prices across major markets fell, while oil, copper and other commodity prices declined on the yuan devaluation.

Futures on the federal funds rate <0#FF:> rose 1.0 to 7.5 basis points on bets a weaker yuan would lead Fed policy-makers to abandon plans to end its near-zero rate policy this year.

A drop in the interest rates on overnight indexed swaps implied traders reduced their expectations on the Fed hiking interest rates in September to 43 percent from 51 percent on Monday, according to Tullett Prebon data.

In the repurchase agreement sector, the cost for overnight loans which bond dealers use to borrow overnight cash from money market funds and other investors was quoted at 0.23 to 0.26 percent, compared with 0.30 percent on Monday, according to ICAP .

In the Treasury bill market, interest rates on six-month T-bills fell to 0.2250 percent after hitting 0.244 percent on Monday, their highest since December 2010.

Other U.S. short-term borrowing costs either held steady or edged higher from Monday.

The London interbank offered rate for three-month dollars was fixed higher for a fifth straight day to 0.31435 percent , a level not seen since October 2012.

Libor is a global rate benchmark for about $350 trillion worth of financial products worldwide. (Reporting by Richard Leong; Editing by Jonathan Oatis)

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