US bill rates remained near year-long lows on Thursday, a day after the Federal Reserve upgraded its outlook on the economy and financial markets but renewed its pledge to hold short-term interest rates near zero percent until a recovery is self-sustaining.
"We don't think conditions will be persuasive enough to make the Fed raise rates earlier than Q1 2011," said David Resler, chief economist at Nomura Securities in New York. The interbank cost of borrowing three-month dollars set a record low on Thursday after the Fed vowed to leave interest rates close to zero percent well into 2010 while benchmark euro rates fell on abundant liquidity.
US three-month bills yielded 0.046 percent, just above the 0.04 percent high rate on Monday's $30 billion auction of three-month T-bills, which matched the lowest yield of the year set on November 23. Six-month bills yielded 0.167 percent, compared with 0.17 percent Wednesday.
Eurodollar futures mostly rose, particularly at the back end of the 2010 curve, pushing implied rates lower after the Fed expressed growing optimism, but left benchmark overnight rates on hold in a zero to 0.25 percent range. Most market participants focused more on the Fed's commitment to hold its ultra-low policy rate target for "an extended period" than on its statement to end most of its emergency lending facilities on February 1.
Massive liquidity injections from central banks have helped drive interbank rates to record lows and some in the market expect them to stay pinned at current low levels for most of the first half of next year. The 2/10-year US Treasury bond yield curve steepened to as much as 277 basis points as interest-rate sensitive two-year paper outperformed.
Safe-haven flows into core bond markets on European concerns about Greece's fiscal health after the country's credit rating was downgraded for the second time in about a week also contributed to the steepening. The three-month dollar Libor was set at 0.25338 percent, a lifetime low.
In the eurozone, three-month euro Libor was fixed down at 0.67188 percent, close to retesting a record low of 0.66938 percent while equivalent sterling rates were unchanged. Benchmark Euribor three-month lending rates sank to a new all-time low after the European Central Bank pumped 97 billion euros into money markets in its last round of 12-month funds. There are now more than 700 billion euros of one-year money in the system and unless the ECB actively removes them, the first big drain won't occur until next June when 442 billion euros of one-year funds are due for repayment.
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