Money markets us rates futures fall on europe worries

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* Front-month Eurodollar futures fall, deferreds up * Dollar Libor rises first time in two weeks * Two-year U.S. swap spread broke 200-day moving average By Richard Leong NEW YORK, May 9 Front-month U.S. short-term interest rate futures fell on Wednesday on jitters that Greece's political turmoil and Spain's bank woes will deepen Europe's debt crisis, causing investors to cut lending to the region's already wobbly banking system. Fear that euro zone banks will struggle to raise dollars in the open market manifested itself in the first rise in the London interbank offered rate on three-month dollars in about two weeks. The increase in this benchmark on interbank borrowing cost coincided with a rise in yields on Spanish and other government debt among weaker euro zone countries. Spanish bank shares, led by Bankia were a drag on European stocks. The FTSEurofirst 300 index closed down 0.3 percent on Wednesday. "European financials are under pressure and sovereign debt spreads are also under pressure," said Richard Gilhooly, an interest rate strategist at TD Securities in New York. Eurodollar futures, which gauge traders' view on the future level of dollar Libor, for delivery through mid-2014 were down as much 3.5 basis points in late morning trading. These contracts traded collectively, known as "packs," traded 2 to 3 basis points lower. Weaker front-month packs, together with a higher Libor fixing, spurred heavy selling in U.S. interest rate swaps, traders and analysts said. The interest rate on two-year interest rate swap agreements was last bid at 0.5760 percent, up 3 basis points on the day. The yield premium on two-year interest rate swap contracts over two-year Treasuries, which is seen as a gauge of investor risk aversion and private dollar funding cost, rose 2.50 basis points to a mid-quote of 33.50 basis points. The two-year swap spread touched 34.50 basis points earlier, a level not seen since late February. It broke its 200-day moving average of 34.00 basis points. On the other hand, latter month Eurodollar contracts rose on expectations that the U.S. Federal Reserve and European Central Bank will leave policy rates longer than previously thought and/or embark on more bond purchases to help their economies. So-called "Blue" and "Gold" packs, or Eurodollar packages with contracts for delivery in mid-2015 to early 2017, were up 1.50 basis points to 1.75 basis points from Tuesday's close. Earlier in London, Libor on three-month dollars rose 0.1 basis point at 0.46685 percent. It had not changed in the previous nine sessions. Libor is a rate benchmark for $360 trillion worth of financial products worldwide.

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