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Informist, Friday, Aug 9, 2024

By Siddhi Chauhan

MUMBAI – Overnight indexed swap rates ended steady today due to a lack of interest rate trajectory on both the global and domestic fronts, dealers said. An overnight rise in US Treasury yields pushed the five-year swap rate slightly, dealers said. 

The one-year swap rate ended at 6.53%, unchanged from Thursday. The five-year swap rate ended at 6.11%, compared with 6.09% the previous day.

The Reserve Bank of India's Monetary Policy Committee outcome was the major cue that the market was looking forward to and with that being done, the market had turned towards global cues, dealers said. The yield on the 10-year benchmark US Treasury note was at 3.96% at the time of the Indian market close against 3.92% on Thursday. US Treasury yields rose after data released on Thursday showed the jobs market was better than expected.

Initial unemployment claims fell 17,000 on week to a seasonally adjusted 233,000 for the week ended Saturday, as compared to 240,000 claims seen in a Reuters poll. This eased concerns that the US economy was heading towards a recession, an expectation caused by data last week that showed the unemployment rate had climbed to a near three-year high in July.

However, the overnight rise in US yields was largely disregarded by the market. While some traders paid fixed rates noting the rise, others said they were still awaiting larger triggers for the US interest rate trajectory, dealers said. With the 10-year US yield remaining below the crucial 4% mark, there were no immediate causes of concern, they said.

"The market is quite steady, there are no cues to bet on. There was some paying in the morning, but then there was very little movement in US yields as well," a dealer at a private bank said. "Traders have now shifted their focus towards the next cue, which is CPI data (both in India and US)."

The domestic CPI data for July, which is scheduled to be released at 1730 IST on Monday, is seen falling to 3.7% from 5.08% in June, according to an Informist Poll. This would be the first time headline inflation is below the RBI's medium-term 4% target since November 2019. Traders are prepared for a higher CPI inflation print after the central bank raised its headline CPI projection by 60 bps to 4.4% at the monetary policy review on Thursday.

Meanwhile, US core CPI in July is expected to fall to 3.2% on an yearly basis from 3.3% in June. On a monthly basis, the data is seen inching to 0.2% from 0.1%. Meanwhile, the headline CPI is seen at 2.9% on year in July, against 3.0% the previous month.

OIS rates may take stronger cues from the US CPI print rather than the domestic one. If inflation rises beyond this, the one-year contract may also rise to 6.60%, while the five-year may reach 6.15%, dealers said. However, if the print is below the median estimate, the rates on the one-year contract may fall below 6.50% while that of the five-year contract may fall even below 6.00%, dealers said. This would happen as the expectation of a 50 basis point rate cut, which eased recently, will get stoked again, dealers said.

Currently, as per data from CME FedWatch tool, 55% of Fed Fund future traders expect a 50-bps rate cut by the US Federal Open Market Committee in its meeting in September, against 100% on Monday. Towards the end, volume in the six-month contract spurted as traders placed bets that aggressive rate cuts in the US would also translate to India, while others disagreed, dealers said.

"Around 200 bps of rate cuts are priced in the US," a dealer at a foreign bank said. "If that comes to pass, you are looking at a big macroeconomic case for India to cut much more than 50 bps that is currently priced in."

OUTLOOK

Swaps are not traded on Saturday. On Monday, swap rates may open steady due to lack of firm global and domestic cues. CPI data in both the US and India is scheduled next week, which is seen as the next important cue for the market, dealers said. 

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 6.43-6.63% and in the five-year segment at 6.00-6.25%.

End

Edited by Aditya Sakorkar

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