Euro swap rates up

Short-dated euro zone swap rates rose on Friday, tracking bond yields after US jobs data prompted traders to pare back expectations on how aggressively the Federal Reserve will cut interest rates this year.
The 97,000 net rise in US non-farm payrolls last month was almost bang in line with the 100,000 consensus forecast, and other aspects of the report such as average earnings and the unemployment rate pointed to labour market strength.
It might have been the slowest pace of job creation in over two years but other indicators this week that had pointed to an even weaker report weren't borne out in the official data.
Bond yields and swap rates rose across the board, more notably at the short end of their respective curves. "There was quite a bit of paying in swaps afterwards, as yields pushed higher," said a swaps trader in Dublin.
"That (the payrolls report) has caused a big reaction, particularly at the front end of the eurodollars strip. Everyone else is following that really." Two-year European swap rates were at 4.13 percent, up from around 4.09 percent late on Thursday, while 10-year rates were up to 4.19 percent from 4.165 percent on Thursday.
These levels were the highest in over a week. Short-dated Euribor interest rate futures sold off around 4.5 basis points across the June-December strip on Friday following the US jobs data. That means the market is pricing in around a 50-50 chance the European Central Bank will raise rates to 4 percent by the end of June, and two in three chance rates will reach 4 percent by the end of the year.
US rates futures sold off after the payrolls data, with traders now pricing in around 40 basis points of cuts by the end of the year, compared to around 50 basis points discounted before the data.
As far as the euro zone market is concerned, traders are waiting to see what the next few weeks hold in terms of ECB expectations. As expected, the ECB raised interest rates by a quarter percentage point on Thursday to 3.75 percent. Bank President Jean-Claude Trichet said in a news conference that rates remain on the accommodative side.
Still, as reflected by the Euribors market, traders aren't fully convinced the ECB will raise rates again this year. "The ECB has left its options open but even if we do get to 4 percent, the ECB probably won't do much more," the trader said.
Ten-year swaps spreads, which are swap rates over the comparable euro zone government bond yield, widened on Friday to their widest level of the year, around 24.5 basis points.