Reuters: US Dollar Report: MONEY MARKETS-Traders see U.S. Fed on hold until 2015

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MONEY MARKETS-Traders see U.S. Fed on hold until 2015 Aug 28th 2012, 19:28 Tweet Share this Email Print Tue Aug 28, 2012 3:28pm EDT * Futures imply view on Fed prolonging low-rate pledge * US 1-month bill sale fetches highest rate since 2011 * Dollar 3-month Libor hits lowest since October By Richard Leong NEW YORK, Aug 28 (Reuters) - Traders on Tuesday bet the Federal Reserve will likely prolong its near-zero interest rate policy into 2015 to go along with a possible quantitative easing move in an effort to stimulate a sluggish U.S. economy. Traders are focused on Fed Chairman Ben Bernanke's speech on Friday, in which they hope he will signal more stimulus in the form of another bout of large-scale bond purchases, dubbed QE3. "The market has priced in a near-zero interest rate pledge to June 2015," Anthony Valeri, fixed income strategist at LPL Financial in San Diego, said on Tuesday. The Federal Open Market Committee, the central bank's policy-setting group, will meet Sept. 12 to 13. The Fed has implemented an array of unconventional policy tools to help the U.S. economy since late 2008 in an attempt to fight a recession exacerbated by the global financial crisis. Two years ago, Bernanke laid the groundwork for a second round of quantitative easing in his Jackson Hole speech, which eventually involved the Fed buying $600 billion worth of long-dated Treasuries. "The expectations of the Fed doing QE3 is driving the entire yield curve," said Rob Robis, head of fixed income macro strategies at ING Investment Management in Atlanta. The yields on longer-dated Treasuries have fallen a quarter percentage point since last week when they touched a three-month high after the minutes of the FOMC's July 31-Aug. 1 meeting showed policy-makers were prepared to deliver another round of stimulus "fairly soon." The reaction to the Fed minutes in money markets has been somewhat muted since most short-term borrowing costs have been locked in a zero to 0.25 percentage point range since December 2008 when the Fed adopted a near zero rate policy. The futures market suggested traders anticipate the central bank would hold its target range on the federal funds rate that it controls near zero into mid-2015, beyond its current guidance of late 2014. The December 2014 fed funds contract last traded up 2 basis point on Tuesday at 99.675, its highest in more than three weeks. Other key dollar rates were mixed on the day. The overnight rate on repos, a key source of funding for Wall Street where it uses Treasuries and other investments as collateral in exchange for cash, was steady at 0.21 percent. The London interbank offered rate on three-month dollars fell to 0.42275 percent, its lowest since late October 2011, due partly to bets that European politicians and policy-makers will come up with a bold program to tackle the region's festering debt crisis. The U.S. Treasury bill sector, however, weakened because of light demand and a recent pickup in supply, analysts said. The U.S. Treasury Department sold $40 billion of new one-month bills at an interest rate of 0.120 percent, the highest since March 2011. Tweet this Link this Share this Digg this Email Reprints Comments (0) Be the first to comment on reuters.com. Add yours using the box above.

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