NEW YORK: Short-term US interest rate futures rose on Wednesday, rebounding from Tuesday's losses, as concerns about Europe's fiscal troubles renewed bets the Federal Reserve would cling to a near-zero rate policy until at least late 2014.
Spain's borrowing costs spiked after a weak bond auction intensified fears the euro zone's fourth-biggest economy might need a bailout like Greece.
"European worries have resurfaced again," said Chucky Retzky, director of futures sales at Mizuho Securities USA in Chicago.
Those concerns pushed away disappointment that Fed policy-makers seem less urgent to embark on a third round of large-scale bond purchase, nicknamed QE3, in a bid to stimulate a US economy still struggling with high unemployment.
The release on Tuesday of the Federal Open Market Committee's minutes of its March 13 meeting led to a broad market sell-off including a drop in US rates futures.
The December 2014 Eurodollar contract last traded up 6.5 basis points at 98.645 after falling 11 basis points on Tuesday, its biggest one-day drop in about two weeks.
Eurodollar futures beyond 2014 were up 5.5 basis points to 8.0 basis points.
Later federal funds futures were up 0.5 basis point to 5.0 basis points from Tuesday's close. They implied traders priced out the chances the US central bank would raise rates earlier than the first quarter of 2014.
OVERNIGHT REPO, FED RATES ELEVATED
While interest rates futures retraced some of their losses, the overnight funding market which banks and Wall Street rely on to finance their businesses remained tight.
Overnight interest rates in repurchase agreements (repos) and federal funds lingered near their highest levels since last summer as Wall Street dealers have been funding the new Treasury debt they bought at last week's auctions, which they have been seeking to resell to investors, analysts said.
The likelihood that short-term rates might spike on another solid government payroll report which could further reduce chances of a QE3 also kept ultra-short-term rates elevated.
"The economic numbers are getting stronger, which would give permission for the Fed to hold off on more stimulus," said Thomas Roth, executive director of US government bond trading at Mitsubishi UFJ Securities USA in New York.
The median forecast on the March US payroll figure is for a 203,000 increase, while the consensus reading on the March jobless rate is 8.3 percent, according to 72 economists recently polled by Reuters.
The US Labor Department will release its nonfarm payroll survey at 8:30 a.m. (1230 GMT) on Friday.
In repo trading, which is what banks and bond dealers charge each other for overnight loans secured by Treasuries, the overnight rate was last quoted at 0.23 percent mid-market, unchanged from late Tuesday.
In the fed funds market, whose rates the Fed monitors closely, the cost for banks to borrow excess reserves from each other overnight was last bid at 0.15 percent, unchanged from late Tuesday.
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