Money markets us rates futures rise on spain, greece worries

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* Bets grow on more U.S. Fed stimulus to cut rates* Deferred Eurodollar futures hit contract highs* Front-month Eurodollar falls on SF Fed chief remarks* Bets reduced Fed will cut rate on bank excess reservesBy Richard LeongNEW YORK/LONDON, July 23 U.S. interest rate futures rose on Monday as worries that the fiscal woes of Spain and Greece could take a further toll on the already sluggish U.S. economy spurred expectations of further monetary stimulus from the Federal Reserve. Traders reckon the U.S. central bank will likely embark on a new program of bond purchases to reduce unemployment and stimulate lending."It's most about the problems in Europe, leading to possibly another round of quantitative easing," said Alex Manzara, vice president at TJM Futures in Chicago. More bond purchases from the Fed would be designed to reduce mortgage rates and other long-term borrowing costs. Spanish 10-year borrowing costs rose to a euro-era high above 7.5 percent on Monday as investors dumped Spain's sovereign debt on bets that the euro zone's fourth biggest economy would soon seek a full-blown bailout. Greece moved back into the forefront of investors' focus as the troika on international lenders -- the EU, European Central Bank and the International Monetary Fund -- will begin its review this week on the nation's progress on the tough fiscal measures it agreed to earlier this year in exchange for a 130 billion euro rescue package required to avert a chaotic default.

"There's a credit concern if there is an imminent shutdown, especially with Spain," said George Goncalves, head of U.S. interest rate strategy at Nomura Securities International in New York. "There is a genuine flight-to-quality."Eurodollar futures for delivery in mid-2014 and beyond were between 0.5 basis points to 7.5 basis points higher than Friday's close. Most posted contract highs. Federal funds futures were mostly steady to up 0.5 basis point. Bets on more action from the Fed led the two-year Treasury note yield to fall to 0.198 percent overnight, which is the lowest level since September 2011. It is within striking distance of the record low of 0.149 percent. A rise in risk premiums in the dollar funding market signaled investor concerns about financial contagion if the fiscal problems in Spain and Greece worsen. The spread between the two-year U.S. interest swap rate and two-year Treasuries widened as much as 25.75 basis points, a level not seen in nearly two weeks. It was last at 24.00 basis points, unchanged from late on Friday.

The gap between the London interbank offered rate and the overnight indexed swap rate for three-month dollars widened to 31 basis points on Monday. However, the benchmark three-month dollar Libor slipped to 0.45110 percent, down 0.1 basis point from Friday's fixing. TALK ON FED'S MOVE ON RESERVES COOLS

While most U.S. interest rates futures gained on the latest news from Europe's festering fiscal crisis, front-month Eurodollar contracts fell on Monday as traders reduced bets the Fed would lower the interest it pays banks on excess reserves they deposit with the Fed. Speculation that the Fed would make such a move emerged after the European Central Bank cut a similar rate earlier this month to zero in on an attempt to prop up the region's faltering economy. Fed Chairman Ben Bernanke acknowledged last week before U.S. lawmakers that cutting the interest on excess reserves (IOER) is a policy tool that the Fed has to stimulate the economy. But many analysts said cutting the IOER from the current 0.25 percent would disrupt the dollar funding market, especially money market funds that have been struggling to maintain their $1 per share value in the protracted near-zero rate climate. In addition, the stimulative effect from a IOER cut would be much less than other possible measures by the Fed, such as a third round of large-scale bond purchases."I don't think there's a force out there that could motivate a cut in the IOER," Nomura's Goncalves said. A top Fed official downplayed the likelihood of the central bank lowering the IOER. The Financial Times in an interview with San Francisco Fed President John Williams published in its Monday edition said Williams was "unenthusiastic" about cutting the IOER as a mean to stimulate a U.S. economy bogged down by high unemployment. Eurodollar futures for delivery from August to March 2013, which rose last week on hopes of an IOER cut, fell 0.25 basis point to 2.0 basis points. The interest rate on overnight repurchase agreements, a key funding source for Wall Street, rose to 0.18 percent, up from 0.14 percent on Friday.