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MONEY MARKETS-U.S. T-bill rates highest since 2008 on rate-hike view
March 8, 2017 / 6:01 PM / 6 months ago

MONEY MARKETS-U.S. T-bill rates highest since 2008 on rate-hike view

* Futures imply traders nearly priced in U.S. rate hike next week

* Libor/OIS spread narrows to tightest level since June (Adds details on money market rate movements, analyst comment)

By Richard Leong

NEW YORK, March 8 (Reuters) - Interest rates on U.S. Treasury bills on Wednesday rose to their highest levels since late 2008 as stronger-than-forecast data on private-sector jobs growth in February stoked expectations the Federal Reserve will raise rates at its policy meeting next week.

Payroll processor ADP said on Wednesday U.S. companies added 298,000 jobs, the biggest monthly rise since December 2015 and beating a median forecast of a 190,000 increase among analysts polled by Reuters.

The futures market implied traders saw the chances of a rate hike next week as high as 91 percent in the aftermath of the stunningly strong ADP data, CME Group’s FedWatch program showed.

Interest rates futures suggested traders have priced in a 57 percent probability the Fed would raise rates at least three times in 2017, according to CME’s FedWatch.

In the T-bill market, the three-month rate reached 0.782 percent, the highest since October 2008, while the six-month rate touched 0.871 percent, its highest level since November 2008, EBS Brokertec data showed.

The rise in T-bill interest rates was offset by concerns about whether the federal government’s statutory borrowing limit will be reinstated on March 16.

The debt ceiling when in effect will mean the U.S. Treasury Department will have to take extraordinary measures to continue issuing T-bills and bonds to pay its obligations.

If the federal debt limit is not increased, the Congressional Budget Office said on Tuesday the government will run out of cash “sometime in the fall of 2017.”

LIBOR/OIS SPREAD COLLAPSES

While T-bill rates have risen sharply on bets on a pending Fed rate hike, a global measure on bank borrowing costs for dollars has edged up at a far slower pace.

The London interbank offered rate for three-month dollars was fixed earlier Wednesday at 1.1090 percent, the highest since April 2009.

Libor is a global benchmark for $350 trillion of financial products worldwide.

Meanwhile the difference between three-month Libor and the three-month overnight indexed swap (OIS) rate, which measures traders’ view on the Fed’s policy rate, has collapsed since early February.

The spread between the two rates contracted to less than 25 basis point, the tightest level since June 2016.

This move suggested optimism that higher U.S. rates would help banks.

“Tightening of very-front-end financial credit spreads like this makes sense, as rate hikes are especially helpful for bank fundamentals,” Bank of America Merrill Lynch’s head of U.S high grade credit strategy Hans Mikkelsen wrote in a research note on Wednesday. (Reporting by Richard Leong; Editing by Chizu Nomiyama)

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