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Surging Fed-Cut Bets Spur Biggest Libor Drop Since 2008 Crisis

Surging Fed-Cut Bets Spur Biggest Libor Drop Since 2008 Crisis

(Bloomberg) -- Money markets are pricing in a half-point cut in U.S. central bank interest rates this month and have baked in about a percentage point of reductions by the end of July.

Bets on easing by the Federal Reserve surged on Monday, while the three-month London interbank offered rate -- a key benchmark for trillions of dollars in financial products -- plunged by the most since 2008. The moves came after central-bank policy makers around the world indicated that they will act as needed to stabilize financial markets in light of the growing coronavirus threat. The yield on the two-year Treasury note headed for its biggest daily drop in more than a decade and fell to a level unseen since 2016.

“Developed market instruments and assets have been screaming for support measures for the last week in light of the financial turmoil and verbal intervention isn’t cutting it,” said Simon Harvey, a London-based currency strategist at Monex Europe. “So they’re now giving central banks an ultimatum -- begin easing or inadvertently tighten financial conditions and prompt a deeper economic contraction due to the virus.”

Surging Fed-Cut Bets Spur Biggest Libor Drop Since 2008 Crisis

Three-month dollar Libor rate fell by 20.9 basis points on Monday to 1.25375%, the lowest since June 2017. The drop was larger than on any day since December 2008.

Fed funds futures indicate that the U.S. benchmark will be around 1.04% by the end of this month, about 54 basis points below the current effective rate for the central-bank benchmark. That’s an additional 17 basis points of reductions than was priced in on Friday. The August contract, which indicates the anticipated rate for July, is close to a full percentage point lower than the current rate

Related Story: Negative U.S. Yields in Sight as Virus Spurs Recession Bets

A full percentage point of easing “is stretched, but without any coordinated fiscal measures as yet the market has had to brace itself for the worst,” said Monex’s Harvey.

Fed Chairman Jerome Powell opened the door to a rate cut at the Fed’s March 17-18 meeting by issuing a rare statement Friday pledging to “act as appropriate” to support the economy. But traders have been further emboldened after statements on Monday from the Bank of Japan and the Bank of England indicating their readiness to act.

The yield on the two-year Treasury, one of the U.S. securities that’s more sensitive to Fed expectations, fell for an eighth straight day on Monday. It plunged by about 18 basis points to 0.7331% as of 7:28 a.m. in New York. The benchmark 10-year rate hit an all-time low of 1.03%.

--With assistance from Alexandra Harris.

To contact the reporters on this story: Benjamin Purvis in New York at bpurvis@bloomberg.net;Dana El Baltaji in Dubai at delbaltaji@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Rachel Evans, Neil Chatterjee

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