Libor:there's a limit to price gains for front-end Eurodollar fu

eurodollar future higher: harder to borrow dollar (most debt and trades are priced in dollar) where there is a risk aversion

RATE FUTURES REPORT: Libor's Decline Might Be Over Soon
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.StumbleUponDiggTwitterYahoo BuzzFarkRedditLinkedIndel.icio.usMySpace Text By Howard Packowitz Of DOW JONES NEWSWIRES CHICAGO (Dow Jones)--A benchmark short-term interest rate won't move much lower this year, some analysts believe. If that's the case, there's a limit to price gains for front-end Eurodollar futures contracts.

Front-end September and December 2010 Eurodollar futures prices moved higher as the underlying three-month London Interbank Offered Rate -- or Libor -- continued its almost unimpeded streak of consecutive daily declines.

The three-month Libor measures the cost of borrowing U.S. dollars in the London interbank market, and it's considered a guide for lending rates assessed to businesses and households.

The British Bankers Association survey of member banks pegged the three-month dollar Libor at 0.35219% on Tuesday, down for 30 of the past 31 business days.

However, the rate likely will not fall below 0.30% this year, meaning there probably won't be a test of the 2010 low near 0.25% established in January, said Piyush Goyal, vice president of interest rate derivatives at Barclays Capital Research.

He contended that the Libor remains vulnerable to the ongoing struggle to resolve sovereign debt problems in Europe, potentially creating banking sector stress.

If Goyal is correct, a Libor above 0.30% for the rest of this year means the September and December 2010 Eurodollar futures contracts won't climb above 99.70.

Libor expectations are calculated by subtracting the futures price from 100.

At Tuesday's settlement, September Eurodollars were up two basis points, or 2/100th of a percentage point, at 99.642 -- projecting Libor at 0.358% when the contract expires Sept. 13.

December Eurodollar futures settled Tuesday at 99.58, up 2.5 basis points, seeing Libor at 0.42% when that contract expires Dec. 13.

At least one large brokerage firm was preparing its clients for a Libor rebound by recommending a pair of put option plays tied to the December Eurodollar contract.

Buyers of put options speculate on lower prices and expectations for higher rates. Puts can also be a hedge or a form of insurance because traders have the right, but not the obligation, to sell futures contracts at a specific price.

In a Tuesday morning trade note, MF Global said it favored a put spread combination anticipating that the December Eurodollar price will fall to 99.50 or below, projecting Libor rising to 0.50% or higher.

The objective of MF Global's other options recommendation reaps maximum profits if the December contract drops to 99.25 or lower. That reflects expectations for Libor to top 0.75%.

Higher Libor fixings are possible on a resumption of European credit stress or more consistent improvement in economic data, said Philip Tyson, an MF Global rate strategist based in London.

U.S. economic data released Tuesday showed some improvement, including a 1.7% increase in housing starts and a 1.0% jump in industrial production during July.

The reports ignited a selloff of longer-term rate futures contracts on Tuesday. A strong stock market rally, also fueled by the data, signaled reduced demand for safe-haven contracts tied to U.S. government-guaranteed debt.

CONTRACT SETTLE CHANGE Nov Fed Funds 99.825 Dn 0.5 basis point * Dec Fed Funds 99.83 Dn 0.5 basis point Jan '11 Fed Funds 99.83 Dn 0.5 basis point Feb '11 Fed Funds 99.815 Dn 0.5 basis point Mar '11 Fed Funds 99.795 Dn 1 basis point May '11 Fed Funds 99.74 Dn 0.5 basis point Jly '11 Fed Funds 99.69 Dn 1 basis point Sep Eurodollars 99.642 Up 2 basis points Dec Eurodollars 99.58 Up 2.5 basis points Mar '11 Eurodollars 99.515 Up 2 basis points Jun '11 Eurodollars 99.41 Up 1 basis point Sep '11 Eurodollars 99.27 Dn 0.5 basis point Dec '11 Eurodollars 99.095 Dn 1 basis point Sep 10-Year Notes 125-21+ Dn 17/32 Sep 30-Year Bonds 132-29 Dn 31/32 Sep Ultra Tsy Bonds 140-15 Dn 1 * A basis point is equivalent to 1/100th of a percentage point. -By Howard Packowitz, Dow Jones Newswires; 312-750-4132; [e-mail]