HONG KONG, June 23 (Reuters) - Dollar funding costs eased further on Tuesday after Libor rates fell on expectations that the Federal Reserve will keep its near-zero interest rate policy despite signs the U.S. recession is nearing its end.
Interest rate swaps in many markets extended their rally on the back of gains by U.S. Treasuries which have benefited from safe-haven trades amid falling equity markets.
In some markets, such as South Korea, uncertainty about the direction and timing of interest rate changes was reflected in swaptions, options to enter into interest rate swaps, with some analysts recommending relative value trades.
In Singapore, 3-month dollars were down to 0.61286 percent from Monday's 0.62214 percent, resuming the downward slide. It is down about 5 basis points from the start of the month and half the levels in March.
Overnight, the London interbank offered rate to borrow three-month dollars dipped to 0.6100 percent from Friday's 0.61188 percent.
The Federal Open Market Committee, the Fed's rate-setting group, will begin to meet on Tuesday amid speculation whether the Fed will expand its asset purchases, especially Treasuries, in a bid to hold down long-term borrowing costs to help the economy.
"The Fed has ample time and should not rush into unwinding quantitative easing and the zero interest rate policy," said David Yen, analyst with Societe Generale, in a note.
"Given the fragile state of the financial system and the economy, the type of policy reversal currently priced in the market would likely trigger a relapse and create a W-shaped recovery pattern."
Australian 3-year interest rate swaps eased to 4.80 percent from 4.86 percent and Singapore 3-year swaps fell 5 basis points (bps) to 2.17 percent.
They tracked the rally in U.S. Treasuries and the flattening in the yield curve.
The yield on the benchmark 10-year note was down to 3.665, down about 2 basis point fromm U.S. trade. The spread between two- and 10-year yields was at 253 bps, down from a record 281 bps earlier in June.
In the won market, the implied volatility on one-month,
one-year swaptions
"The sell-off in Korean fixed income markets has taken some segments to cheap territory," said Merrill Lynch in a research report.
The three-year treasury yield fell 6 bps to 4.14 percent after jumping to a multiple-month peak of 4.30 percent in mid-June after the central bank comments that it was seeking to control liquidity in the market.
"The markets have likely misinterpreted the BoK Governors comments as hawkish and assign too large a possibility for policy reversal," the Merrill Lynch note said while recommending buying 3-year futures. (Reporting by Umesh Desai; Editing by Jan Dahinten)