Markets News

US RATE FUTURES-Fed rate cut by Tues almost discounted

LONDON, Sept 15 (Reuters) - U.S. interest rates futures rallied on Monday to almost price in a quarter percentage point interest rate cut from the Federal Reserve at or before its policy meeting on Tuesday, as concerns over the stability of the banking system deepened.

Fed funds futures contracts attached an 88 percent chance the Fed will lower rates by 25 basis points at or before Tuesday's Federal Open Market Committee meeting. See FEDWATCH.

A quarter point rate cut in the central bank’s fed funds target rate to 1.75 percent by its October 29 FOMC meeting was fully discounted. Overnight dollar deposit rates jumped to at least half a percentage point above the Fed’s current 2 percent overnight target rate as banks scrambled for cash from counterparties increasingly unwilling to lend.

Treasury bond yields sank, with two-year yields falling more than 40 basis points to a five-month low below 1.80 percent US2YT=RR and 10-year Treasury futures posting their biggest one-day gain since the time of the 1987 stock market crash.

Investment bank Lehman Brothers LEH.N filed for bankruptcy protection, Bank of America BOA.N agreed to buy Merrill Lynch MER.N and reports said the world's largest insurer AIG AIG.N had asked the Federal Reserve for a $40 billion bridge loan.

The Fed also expanded its liquidity provision facilities and the collateral it accepts for cash loans. These are its latest efforts to shore up the financial sector in the year-long credit crisis that is taking new and larger victims.