Aug 11 Traders pared bets that the U.S. Federal Reserve would raise interest rates this year after China devalued its currency in a bid to help its exports, adding disinflation pressure on the global economy. U.S. short-term interest rates futures rose, while the expected policy rate in over-the-counter trading fell further from its highest level since June 2010 set last week. The surprise 1.9 percent devaluation of the yuan was the latest measure the Chinese government has deployed to combat weakening economic growth and stock market turbulence. While the devaluation was considered small, the move caused some traders to think what other efforts Beijing might use to bolster the world's second largest economy.
"It's signaling intention. What the market fears most is the unknown," said David Keeble, global head of interest rates strategy at Credit Agricole Corporate & Investment Bank in New York. Stock prices across major markets fell, while oil, copper and other commodity prices declined on the yuan devaluation. Futures on the federal funds rate <0#FF:> rose 1.0 to 7.5 basis points on bets a weaker yuan would lead Fed policy-makers to abandon plans to end its near-zero rate policy this year.
A drop in the interest rates on overnight indexed swaps implied traders reduced their expectations on the Fed hiking interest rates in September to 43 percent from 51 percent on Monday, according to Tullett Prebon data. In the repurchase agreement sector, the cost for overnight loans which bond dealers use to borrow overnight cash from money market funds and other investors was quoted at 0.23 to 0.26 percent, compared with 0.30 percent on Monday, according to ICAP .
In the Treasury bill market, interest rates on six-month T-bills fell to 0.2250 percent after hitting 0.244 percent on Monday, their highest since December 2010. Other U.S. short-term borrowing costs either held steady or edged higher from Monday. The London interbank offered rate for three-month dollars was fixed higher for a fifth straight day to 0.31435 percent , a level not seen since October 2012. Libor is a global rate benchmark for about $350 trillion worth of financial products worldwide.
* Traders see no more than 40 pct chance of rate hike in Sept.* U.S. fed funds rate reaches highest since April 2013* Dollar Libor falls from highest level since Oct. 2012By Richard LeongNEW YORK, Aug 12 Traders on Wednesday scaled back further their bets that the U.S. Federal Reserve would increase interest rates this year after China devalued its currency for a second day in an effort to help its exporters. Short-term U.S. interest rates markets signaled traders see no more than a 40 percent chance the U.S. central bank would raise rates at its Sept. 16-17 meeting.
Following a solid July jobs reports last Friday, traders had priced in just above a 50-percent probability Fed policymakers would be in favor of raising its target on the federal funds rate from a zero to 0.25 percent range. The surprise move from Beijing dropped the yuan to a four-year low. It roiled financial markets as traders bet a weaker yuan would re-ignite disinflation pressure globally, making it tougher for the U.S. economy to achieve the Fed's 2 percent inflation target, analysts said."That has made a huge impact on people's thinking. I'm less inclined to believe that the Fed would move in September, but I'm still sticking to it," said Ellis Phifer, a market strategist at Raymond James in Memphis.
Fed funds futures implied traders see a 39 percent chance of a rate increase in September and a 66 percent chance in December, according to CME Group's FedWatch program. This compared with 45 percent chance in September and 71 percent chance in December on Tuesday. In the overnight indexed swaps (OIS) market, the decline in overnight borrowing costs suggested traders reduced their expectations on a September Fed rate hike to 40 percent, down from 43 percent on Tuesday, according to Tullett Prebon data.
As traders pared their rate-hike bets in derivatives, overnight borrowing costs in the cash market were mixed. The fed funds rate, which banks charge each other to borrow excess reserves, averaged 0.15 percent on Tuesday, the highest level since April 2013. It was last quoted at 0.13 to 0.14 percent, according to ICAP. In the repurchase agreement sector, the cost for overnight loans which bond dealers use to borrow overnight cash from money market funds and other investors, was quoted at 0.28 to 0.29 percent, above Tuesday's 0.26 percent, according to ICAP . The London interbank offered rate for three-month dollars fell to 0.30930 percent from Tuesday's 0.31435 percent, the highest since October 2012. Libor is a global rate benchmark for about $350 trillion worth of financial products worldwide.