By Liz Capo McCormick Aug. 7 (Bloomberg) -- Implied yields on Eurodollar futures expiring in a year or more soared as traders lifted bets the Federal Reserve will increase rates after a government report showed the U.S. lost fewer jobs in July than forecast. Employers eliminated 247,000 jobs last month, less than the 325,000 median forecast in a Bloomberg News survey. The report from the Labor Department triggered a steepening of the Eurodollar yield curve between the 2009 and 2010 contracts as implied yields on the longer-term contracts rose at a quicker pace that those expiring this year. The difference, or spread, between the implied yields on the Eurodollar futures contract that expires in September and the contract due in September 2010 is 165 basis points, the widest for these two series contracts since the recession began in December 2007. The spread was 151 basis points yesterday and finished last week at 128 basis points. A basis point is 0.01 percentage point. “The spread between the first- and second-year contracts widened as the better-than-expected economic data fueled expectations that the Fed will be tightening ahead,” said Alexander Manzara, a futures broker at TJM Institutional Services on the Chicago Mercantile Exchange. “We’ve probably come out of the recession, although growth will be low. Supply issues are likely also playing into overall curve movements, as the two-year Treasury notes sold last week weren’t so well- received and we have more supply coming next week.” Three-Month Libor Yields implied by Eurodollar futures are based on expectations for the three-month dollar London interbank offered rate, or Libor. The contracts trade in price terms and are sometimes used to bet on the direction of central bank rates. Three-month Libor was little changed today at 0.461 percent. The yield on the September contract rose 1 basis points today to 0.495 percent, while the rate on the September 2010 contract increased 15 basis points to 2.145 percent. The implied yield on contracts beyond 2010 rose by about the same amount, between 19 and 21 basis points. The unemployment rate fell to 9.4 percent in July, down from 9.5 percent in the previous month. The smaller-than- expected drop in jobs helped push Treasury yields higher, with the two-year note up 10 basis points to 1.30 percent. The Treasury will sell $75 billion in bonds and notes next week, issuing $37 billion of three-year notes, $23 billion in 10-year securities and $15 billion in 30-year bonds, the Treasury said Aug. 5. Federal funds futures contracts traded on the Chicago Board of Trade showed traders marginally raised bets that the Fed rate will lift rates over the next year. Traders give a 42 percent probability the Fed will increase its target rate for overnight loans to at least 0.5 percent from its current zero-to-0.25-percent range by December, which compares with 38 percent odds yesterday. The chance that the central bank will lift rates to at least 0.5 percent by January increased to 69 percent from 62 percent yesterday. To contact the reporter on this story: Liz Capo McCormick in New York at Emccormick7@bloomberg.net

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