US federal fund futures rose on Friday, as traders widely anticipated the Federal Reserve will leave its short-term interest rate target alone after its policy meeting next week. Short-term cash lending rates were kept in check by a stampede into cash and other low-risk assets as US President Barack Obama's proposed changes to credit markets and the bank industry rattled investor confidence, analysts said.

"Financial markets don't do well with uncertainties," said Alex Roever, short-term fixed income strategist with J.P. Morgan Securities in New York. Across the Atlantic, key short-term rates fell with the bank-to-bank lending cost on three-month euros declining to a record low. Weaker-than-expected data on UK retail sales, together with Greece's fiscal woes, fuelled worries over the pace of an economic recovery in the region.

December fed funds were up 2.5 ticks at 99.335, implying traders are pricing in a fed funds rate of 66.5 basis points at the end of the year, and more than 40 basis points below what they had expected at the end of 2009. Like its US counterpart, the European Central Bank is expected to keep interest rates low and ensure the financial system has ample cash until a recovery is seen sustainable.

"With the euro zone sovereign credit situation still far from resolved, the ECB is highly likely to keep an easy liquidity policy in place for the next couple of months," said Peter Chatwell, a market analyst at Calyon in London. This view has exerted downward pressure on the benchmark London interbank offered rates on three-month euros. It sagged to a record low of 0.61375 percent. Equivalent three-month Libor on sterling slipped to 0.61438 percent but three-month Libor on dollars edged up 0.24906 percent.

Copyright Reuters, 2010