February 19, 2010 / 7:17 PM / 9 years ago

MONEY MARKETS-Futures push rate hike bets sooner on Fed move

   * Treasury bills fall on Fed discount rate hike
 * Fed funds futures point to more bets on hike by Sept
 * Dollar Libor rates edge up after Fed discount move
 (Recasts; changes byline, dateline, previous LONDON)
 By Luciana Lopez
 NEW YORK, Feb 19 (Reuters) - Investors on Friday ramped up
bets on a rate hike later this year and pulled up yields on
Treasury bills, after last night's move by the U.S. Federal
Reserve to raise emergency borrowing costs for banks surprised
markets.
 The Fed took its discount rate to 0.75 percent from 0.5
percent, but said this was not a precursor to a tightening
cycle.
 "The discount rate move is part of a normalization process,
which is akin to our discontinuing many of our liquidity
programs," St. Louis Federal Reserve Bank President James
Bullard told reporters on Thursday.
 "And it does not indicate anything one way or the other
about what we might eventually do with the federal funds rate,"
he added. For details see [ID:nN18246964]
 This week, fed funds futures contracts <0#FF:> had
perfectly priced in a rate hike of 25 basis points by
November.
 But on Friday investors saw greater chances of a tighter
fed funds rate earlier in the year. Treasury bills fell on the
news as well.
 Despite the Fed's characterization of the discount move as
separate from monetary policy, "the market is taking quite a
lot of effort to persuade," said David Sloan, chief economist
North America at 4Cast in New York.
 "I'm not sure it's appropriate."
 Implied prospects that the Fed will raise its benchmark
rate by September rose to 66 percent, from 54 percent before
the Fed's announcement, based on the 4 p.m. Chicago time (2200
GMT) close of the September fed funds futures contract at the
Chicago Board of Trade. [ID:nN18611988]
 EUROPE AFFECTED
 Dollar interbank rates edged up on Friday on the Fed news,
as further signs of tightening credit conditions in the euro
zone raised expectations that the European Central Bank will
find it hard to unwind its extraordinary measures.
 The difference in outlook for future interest rates saw the
euro fall to a nine-month low against the dollar and December
Euribor and Eurodollar prices FEIZO EDZ0 converge to their
tightest since May 2009 as the implied yield spread widened.
 Three-month dollar Libor rates USD3MFSR= were slightly
higher at 0.25194 percent, while equivalent euro rates also
edged up to 0.60625 percent EUR3MFSR= [ID:nEAP000041].
 Greek repo remained closed for business this week and
analysts said there were signs of caution in the Spanish
market.
 "The perceived risk of a Greek government default has been
pushing Greek general collateral prices wider since
mid-November, but it has been the lack of appetite to take on
counterparty risk with the natural holders of that debt --
Greek domestic banks -- that has, over the past month,
effectively frozen the market altogether," said ICAP strategist
Chris Clark.
  Central clearing systems remove this counterparty risk for
Italian, Irish and Portuguese repo but for the Spanish, as with
the Greeks, trades are settled on a bilateral basis.
 (Additional reporting by Kirsten Donovan in London; Editing by
James Dalgleish)



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