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Informist, Friday, Aug 23, 2024

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended steady today as traders awaited fresh cues on US interest rates from Federal Reserve Chair Jerome Powell's speech at the Jackson Hole Economic Symposium after market hours, dealers said. There were no changes in rate view despite interest rate triggers on Thursday.

The one-year swap rate ended at 6.52%, against 6.50% on Thursday. The five-year swap rate ended at 6.08% against 6.07% the previous trading day.

Minutes of the Reserve Bank of India's Monetary Policy Committee meeting on Aug 6-8, released after market hours Thursday, were on expected lines and were a repeat of the policy tone's focus on bringing inflation down to the central bank's 4% target, dealers said. RBI members of the panel, including Deputy Governor Michael Patra, said that growth remained robust. External members including Ashima Goyal and Jayanth Varma said that India was not meeting its potential growth due to overtight monetary policy. The market's reactions to the external members' comments were limited as all three members are at the end of their terms, dealers said.

Trade in short-term swap contracts was limited as India's rate cuts were largely priced in to begin by December, following a US Federal Open Market Committee rate cut cycle that is expected to start in September, dealers said. The CME FedWatch tool showed Fed fund futures factoring in only a 28.5% possibility of a 50-bps rate cut. The remainder have fully priced in a 25-bps rate cut. However, domestic traders reversed their paid fixed rate bets in the five-year swap contract after the OIS rate fell below the key 6.08% mark on Thursday, ending at a 14-month low.

"Now that the support at 6.08% has been taken out, the five-year rate is reliant on foreign flows for direction," a dealer at a private bank said. "And a lot of domestic traders have been stopped out (hit stop-losses), so they will not be aggressive in paying."

A rise in US Treasury yields in the second half of the day, ahead of Powell's speech, kept the five-year swap rate little changed. The yield on the 10-year US Treasury note rose to a high of 3.86% intraday, against 3.83% at the end of Indian market hours on Thursday. A rise in US yields narrows the interest rate differential between safe-haven assets and emerging market debt, making the latter less appealing to foreign investors.

The market was sanguine heading into the speech, on the view that the Fed Chair would acknowledge softening inflation and labour market data and be the latest policymaker to signal the US Federal Open Market Committee would cut rates in September. However, traders were not convinced that Powell would signal a deeper 50-basis-point rate cut, though several traders hoped that he would not rule it out, dealers said. Signals of a deep rate cut may be taken as a signal of panic by the US central bank after the US unemployment rate rose to a near-three-year high in July, something that Powell is likely to avoid, they said.

"Offshore activity was not significant today," a dealer at a foreign bank said. "A lot of receiving has happened over the last two days (Wednesday and Thursday), which has slowed down."

OUTLOOK

OIS rates are not traded on Saturday. On Monday, swap rates may take cues from US Fed Chair Powell's comments on the US interest rate trajectory at the Jackson Hole summit. The comments were due 1930 IST.

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

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

Edited by Akul Nishant Akhoury

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