Short-term costs to borrow dollars fell on Tuesday on reduced concerns that the Federal Reserve might raise interest rates sooner than the market expects. Rate-hike worries also retreated on news the government approved 10 of the largest US banks to pay back $68 billion in federal bailout money.
US market rates soared on Friday after a much less-dire report on US job loss in May kindled fears that the US central bank might end its near-zero interest rate policy sooner than traders had thought. Analysts worry that a spike in borrowing costs would interfere with the government's economic stabilisation effort, which has cost hundreds of billions of dollars.
Friday's sell-off was likely overdone, analysts say. "The most liquid (rates) markets are now not looking at the Fed raising rates this year," said Rudy Narvas, senior strategist at 4Cast Ltd in New York. According to US rate futures, traders reduced their bets on the Fed raising its rate target by a quarter percentage point at year-end from the current zero to 0.15 percent range. The implied chances of a rate hike as soon as November declined to 44 percent from 94 percent late Friday.
Other key short-term dollar rates also fell as worries about a year-end rate hike subsided since Friday. The benchmark three-month dollar London interbank offered rate was fixed at 0.64750 percent - below a one-week high of 0.65 percent set on Monday and above its record low of 0.62938 percent last Thursday. The premium three-month dollar Libor trades over the Overnight Index Swap rate held steady at 42 basis points, suggesting stability in interbank lending.
Libor is a global rate benchmark. Some $150 trillion of financial products around the world are pegged to Libor. In the dollar interest rate swap market, the spread on two-year swaps over Treasuries - a gauge of longer-term financial stress - shrank to 49.00 basis points midmarket midday Tuesday vs 52.25 basis points late Monday.
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