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Flying Dutchman

Us I.r Hike In Jan 2010 Could Be On The Cards?

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CHICAGO (Dow Jones)--Bolstered by a better-than-expected jobs report, U.S. interest rate futures markets Friday projected the Federal Reserve will begin raising its key short-term federal-funds rate late this year or early in 2010.

Futures prices for short- and long-term rates fell sharply, equating to expectations for higher rates, in reaction to data showing a milder-than-expected decline in nonfarm payrolls last month.

The Labor Department said the economy lost 247,000 jobs in July from a 443,000 drop in June. Economists surveyed by Dow Jones Newswires anticipated a 275,000 July job loss. Also, the July unemployment rate fell to 9.4%, from 9.5% in June, the first time the rate has fallen since April 2008.

As a result of the data, the February 2010 fed-funds futures contract was fully priced for the Federal Open Market Committee to increase the funds rate to 0.5% at its late-January meeting, from the current historically low range of 0% to 0.25%.

Just prior to the data, the same contract priced in about an 84% chance for a 0.5% rate.

The shorter-dated December fed-funds contract had priced in as much as a 50% chance that the Fed would initiate an inflation-fighting tightening campaign as soon as the meeting in mid-December. Recently, the December contract priced in about 38% chance, up from about a 30% chance as priced in just before the data release, then priced in about a 100% chance a little more than an hour after the data came in.

Prices plunged for Eurodollar futures, another measurement of short-term rate expectations. Quarterly 2010-2011 contracts were recently about 20 basis points lower, reflecting the view that the London Interbank Offered Rate will move substantially higher during the next couple of years.

Eurodollar futures are tied to settlement expectations for the three-month dollar-denominated Libor, which typically moves in the same direction as the competing U.S. funds rate.

Meantime, contracts tied to long-term Treasury futures were sharply lower after Friday's jobs report, equating to expectations for higher long-term rates.

Prices for September 10-year Treasury notes and 30-year Treasury bonds fell to 1 1/2-month lows. Treasury contracts were also under pressure ahead of next week's record high $75 billion quarterly refunding of the government's massive debt.

There's concern among traders whether there will be sufficient investor demand for the cash Treasury securities up for sale next week.

-By Howard Packowitz, Dow Jones Newswires; (312) 750-4132; howard.packowitz@dowjones.com

Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http://www.djnewsplus.com/access/al?rnd=A3...b3kWTJOsA%3D%3D. You can use this link on the day this article is published and the following day.

(END) Dow Jones Newswires

August 07, 2009 09:54 ET (13:54 GMT)

Edited by Flying Dutchman

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