US short-term interest rates futures skidded on Friday on remarks from Federal Reserve Chairman Ben Bernanke fanned worries the central bank will begin moving away from its ultra-easy monetary policy. Meanwhile, deferred Eurodollar futures contracts from 2010 and beyond suffered their biggest one-day loss in more than seven weeks.
Bernanke late Thursday said while the Fed's support for the economy will likely continue for an extended period, it will have to end its emergency financial programs once the economy recovers in a bid to avert inflation. Some traders were spooked by Bernanke's comments, sparking the sell-off in rates futures, but the consensus view among analysts did not change.
They expect the Fed, along with the Bank of England and European Central Bank, will hold record low policy rates steady well into 2010. "They can quickly remove the emergency accommodation while keeping rates low. The market is getting a little ahead of itself it seems," said Christian Cooper, an interest rate strategist with RBC Capital Markets in New York. A week ago, a disappointing US payrolls report rekindled fears on the pace of a economic recovery.
But dollar rates futures fell sharply, with December 2010 Eurodollar dropping 14 ticks - the largest one-day decline for that contract since August 21 when Bernanke's remarks on an economic rebound triggered a rates sell-off. Federal funds futures suggested traders are not only pricing the chances of the US central banks raising rates next year, but they are also bracing for the probability of aggressive tightening from the Fed.
LIBOR NEAR BOTTOM
Across the Atlantic, benchmark interbank borrowing costs in London held near record lows on Friday. Analysts said London interbank offered rates may have bottomed as Fed's Bernanke and ECB President Jean-Claude Trichet have acknowledged that policies will have to be tightened when they become a threat to price stability.
On Friday, the three-month dollar Libor was set at 0.28438 percent, unchanged for a third consecutive day and above a record low of 0.28250 percent in late September. Equivalent euro and sterling Libor edged up to 0.70250 percent and 0.55531 percent, above their all-time lows of 0.69375 percent and 0.54 percent set recently.