By Katy Burne 

A brief surge Thursday morning in the price of a popular derivative used to bet on central-bank rate moves is the latest sign of markets reacting in unexpected ways under stress.

A eurodollar-futures contract expiring in December 2019 rose sharply to 99.735 around 8 a.m. EST from 98.595 around half an hour earlier, traders said. Such moves are rare over a period of days, let alone half an hour, they said. By 9 a.m., the contract was back below its opening level. A higher level implies a lower prospect of Federal Reserve rate increases by the contract date.

Some attributed the rapid price increase, an event known as a "flash rally" in Wall Street parlance, to sentiment changes around two days of testimony in Congress by Federal Reserve Chairwoman Janet Yellen. In her testimony, she addressed the potential for negative interest rates as a policy tool. The adoption of negative rates in Japan and the extension of rates further into negative territory in Sweden have sent shudders through markets in recent days.

Thursday's moves also coincided with big price increases in U.S. Treasurys and gold, as investors flocked to haven assets amid a fresh selloff in stocks and fears about the health of European banks. The yield on the 10-year Treasury note dropped to 1.642% from 1.706% on Wednesday. Gold futures gained 4.5% to $1,247.90 an ounce, and the dollar fell 1% against the yen to Yen112.22.

Such moves show traders are nervous about the pace of interest-rate shifts and the response of financial markets to Fed policy weeks after the central bank lifted rates for the first time in nearly a decade.

"Expectations for future Fed policy are very much in flux," one interest-rate trader said.

They also underscore the perceived vulnerability of financial markets to sudden moves that don't always seem supported by economic data or other fundamentals, a perception that traders say can increase investors' impulse during turmoil to sell riskier assets and buy safer securities.

Recent episodes of apparent U.S. market instability include the sharp stock selloff of Aug. 24, 2015, which included the halt of hundreds of exchange-traded funds, along with the October 2014 flash rally in U.S. Treasurys and the May 2010 "flash crash" in the stock market.

A spokeswoman for CME Group Inc., which administers the eurodollar contract's trading on its futures exchange, declined to comment.

Write to Katy Burne at katy.burne@wsj.com

 

(END) Dow Jones Newswires

February 11, 2016 18:02 ET (23:02 GMT)

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