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Informist, Wednesday, Jul 31, 2024

By Anupreksha Jain

MUMBAI – Overnight indexed swap rates ended lower as offshore traders received fixed rates anticipating that the US Federal Open Market Committee will indicate a softer monetary policy outlook later today, dealers said. Moreover, an intraday ease in US Treasury yields also led to receiving momentum in the market. 

The one-year swap rate ended at 6.67%, against 6.69% on Tuesday. The five-year swap rate ended at 6.22%, compared with 6.26% on the previous trading day.

"Traders are positioning ahead of the FOMC meeting as they believe that the tone of the committee will be dovish," a dealer at a primary dealership said. "Also, US yields (on the benchmark 10-year Treasury note) eased to 4.13%, and this has also helped."

The US Federal Reserve will detail its policy outcome at 2330 IST. The market widely expects it to keep the interest rate unchanged at 5.25-5.50%, dealers said. According to the CME FedWatch Tool, Fed fund futures show a 96.9% chance of rates remaining unchanged at the meeting, while the rest expect a cut of 25 basis points.

The recent slew of economic data in the US has hinted towards a slowing down in inflation and employment, and has paved the way for the US Fed to cut interest rates as early as September, dealers said. Therefore, traders expect the Federal Open Market Committee to provide clear guidance on its rate cut trajectory, dealers said. 

Currently, Fed fund futures traders have priced in 100% certainty of rate cuts by September in the US. Traders will look forward to the comments of Fed Chair Jerome Powell, which may give insight into the trajectory of interest rates in the world's largest economy, dealers said.

Meanwhile, some others said that the market has factored in that the FOMC is likely to adopt a softer monetary policy outlook, though there is still some caution in the market regarding the same, dealers said. Therefore, the receiving momentum slowed down towards the end of the day, dealers said.

"Traders across the world are punting on a softer FOMC tone. They think that Powell will bring a lot of goodies," a dealer at a private bank said. "The market has priced in a 25-bps cut in rates by Sep in the US. This policy meeting will definitely give positive cues to the market."

During the day, the yield on the 10-year US benchmark US Treasury note eased to the day's low of 4.13% against 4.18% at the time the Indian market closed on Tuesday.

OUTLOOK

On Thursday, swap rates may take cues from the US Federal Reserve policy meeting outcome, due at 2330 IST, dealers said. The US rate-setting panel is expected to keep the interest rate unchanged at 5.25-5.50%. 

The Bank of England is also set to detail its policy review on Thursday. The central bank's first interest rate cut since 2020 hangs in balance amid increased uncertainty, as key policymakers have not spoken publicly for more than two months due to rules in the run-up to the General Election.

Any sharp movement in US Treasury yields and crude oil prices may also lend cues at the opening. The swap rate in the one-year segment is seen at 6.60-6.80% and in the five-year segment at 6.20-6.35%.

End

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

Edited by Deepshikha Bhardwaj

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