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MONEY MARKETS-Traders roll back U.S. rate hike view on weak GDP data
July 29, 2016 / 9:23 PM / a year ago

MONEY MARKETS-Traders roll back U.S. rate hike view on weak GDP data

* Futures imply traders see rate hike less likely by
mid-2017
    * Dollar Libor rises to fresh seven-plus year high

 (Updates market levels, adds table)
    By Richard Leong
    NEW YORK, July 29 (Reuters) - U.S. interest rate futures
rose on Friday as data on weaker-than-forecast economic growth
in the second quarter led traders to roll back expectations of a
U.S. rate increase from the Federal Reserve.
    A key measure on what banks charge each other to borrow
dollars for three months posted its smallest daily rise in more
than a week, prompted by U.S. money market funds' reduced demand
for short-term bank debt. 
    Gross domestic product, the government's broadest economic
gauge, grew at a 1.2 percent annual rate after rising by a
downwardly revised 0.8 percent pace in the first quarter, the
Commerce Department said on Friday. 
    "Today's GDP data would suggest there are still more
mountains to climb before tightening policy," said Todd Colvin,
senior vice president at Ambrosino Brothers in Chicago.
    Federal funds futures reached their highest levels in two
weeks or more following the disappointing GDP data.
    The fed funds contract for December delivery implied traders
saw a 33 percent chance the U.S. central bank would raise its
target range on policy rates, currently at 0.25 percent to 0.50
percent, by year-end, down from 43 percent on Thursday,
according to the CME Group's FedWatch program. 
    Earlier this week, rates futures suggested traders had
priced a 53 percent probability the Fed may raise rates by
December.
    Meanwhile, the London interbank offered rate on three-month
dollars for an 11th straight session to 0.7591 percent, its
highest since May 2009. It was up 0.26 basis point, which was
its smallest increase since July 19.
    The drop in money fund demand for bank debt stemmed from
some prime funds converting to ones that own U.S.
government-only securities in advance of an Oct. 14 deadline on
new regulations.
    "The three-month Libor's rise has muddied the waters, as
money market reforms have forced the shift from prime funds to
government-Treasury funds," Colvin said.
    On Oct. 14, the Securities and Exchange Commission will
require prime money funds or those that can invest in bank paper
and T-bills and other government securities to float their
per-share net asset value or impose redemption gates and
liquidity fees on redemptions in time of market stress.
    Some prime funds have changed over to government-only funds
which are exempt from these SEC rules.
    Since October 2015, prime fund assets had fallen by about
$500 billion to $1 trillion with most of the money going into
government-only money funds, according to UBS analysts.
    Below is a table of implied probabilities on traders' view
on a Fed interest rate hike according to the CME Group FedWatch
program which calculates the probabilities based on federal
funds futures and options prices: 
        Fed funds  Latest (in       Prior    Week ago
         contract        pct)     session    (in pct)
                                 (in pct)  
 Sept 2016                 12          18          20
  Nov 2016                 12          20          22
  Dec 2016                 33          43          48
 June 2017                 44          55          63
 
    
    
     


 (Reporting by Richard Leong; Editing by Jonathan Oatis)

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