26000 percent on Friday downsharply from 1

Spreads contract on weak jobs data, falling Libor Bonds Two-year spread tightest since July 2007 Ten-year spread tightest since mid-December By Richard Leong NEW YORK, Jan 9 (Reuters) - The cost of exchanging U.S.fixed-rate interest payments for floating rates fell on Friday,as another set of dismal jobs figures supported the view thatinterest rates will linger at rock-bottom levels. The yield premium on two-year swaps over Treasuries fellfor a fifth straight day, bringing it down to its tightestlevel since July 2007. "The jobs report just confirmed that rates will stay lowfor a long time and that tends to help swaps and other spreadproducts." said Ajay Rajadhyaksha, head of U.S. fixed-incomeand securitized products strategy with Barclays Capital in NewYork.

On Friday, the government said the jobless rate jumped to7.2 percent in December, the highest level in nearly 16 years,as job losses snowballed. For details, see ID:nN09282664 The gloomy report reinforced the notion the Federal Reservewill continue its efforts to keep a lid on borrowing costs inorder to help cash-strapped consumers and companies during thecurrent recession. Tighter swap spreads lower swap rates and stimulate loandemand. There have been nascent signs of improved lending in theconsumer and corporate sectors. So far this week, companiessold more than $21 billion in new bonds, the most since $33billion offered in the week of May 18, according to ThomsonReuters data. ID:nN08544788 Increased bond supply has in turn led to more hedgingactivity in swaps, analysts said. The benchmark three-month London interbank offered rate ondollar USD3MFSR was fixed at 1.26000 percent on Friday, downsharply from 1.35375 percent on Thursday, according to theBritish Bankers' Association.

On the week, three-month dollarLibor fell 15.25 basis points. ID:nL9302073 Two-year swap spread narrowed to 52.00 basis points in latemorning trading from 56.80 basis points late Thursday. Two-yearspread has fallen well below the record peak above 160 basispoints seen in October. Ten-year swap spread tightened to 14.75 basis points, thetightest since mid-December, compared with 15.75 basis pointson Thursday. Thirty-year spread returned to negative territory thisweek, due partly to hedge demand tied to exotic investments.