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Informist, Monday, Sep 2, 2024

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended higher today due to a rise in US Treasury yields. Hopes of an aggressive rate cut in the US have faded heading into the September Federal Open Market Committee meeting, dealers said. 

The one-year swap rate ended at 6.51%, against 6.49% at Friday's close. The five-year swap rate ended at 6.12%, against 6.08% the previous trading day.

Fears of a recession in the US, which could lead to the US FOMC sharply cutting interest rates to support growth, have ebbed over the course of the past month. Latest personal consumption expenditure data, released Friday, showed a resilient consumer. Focus has shifted from inflation data to jobs numbers and growth ever since Federal Reserve Chair Jerome Powell stressed the US central bank would not want any further weakening in the labour market after July's unemployment rate touched a near-three year high.

The five-year swap rate rose as offshore traders unwound their received fixed rate positions, with US Treasury yields rising and hopes of a 50-bps rate cut falling to 31%, according to the CME FedWatch tool. The yield on the 10-year benchmark US Treasury note rose to 3.91% today from 3.86% at the time the Indian market closed Friday. The US market is shut today on account of Labor Day. At least a 25-bps rate cut is fully priced in by Fed funds futures at the Sep 18 rate decision in the US. 

"(Offshore) Receivers have received massive amounts on the view that there's going to a (US) rate cut, and it could be bigger than 25-25-25 (25 bps each in September, November and December," a dealer at private bank said. "My sense was at the trade lost momentum today and started getting unwound."

Near-term swap contracts had a relatively large traded volume after the release of India's Apr-Jun GDP on Friday. June quarter growth slowed to a five-quarter low of 6.7%, against the median of 6.9% in an Informist poll and well below the RBI's projection of 7.1% growth. RBI officials on the Monetary Policy Committee, including Governor Shaktikanta Das, have so far shied away from terming growth anything other than "strong". Media reports quoted Das as saying that the RBI was still confident of India's growth meeting the central bank's forecast of 7.2% in 2024-25 (Apr-Mar) due to a pickup in government spending and a strong monsoon in the rest of the year.

One sluggish dataset on GDP growth would not severely impact the Monetary Policy Committee's decision on interest rates, dealers said. Das has continually stressed the need for headline CPI inflation to align to the RBI's 4% target on a durable basis, before cutting rates, which is not projected until at least Apr-Jun 2025. Some traders had also placed bets on a 75-bps rate cut cycle in India, instead of the consensus 50-bps view, if GDP growth slowed to 6.5% or less. Those bets were also unwound today, particularly in near-term swap rates, dealers said.

"Ultimately, there's no direction, so let's wait for data and look at US yields breaking 4% (on the 10-year US yield) before we starting judging which way OIS will go," a dealer at a primary dealership said.

OUTLOOK

OIS rates are seen steady on Tuesday ahead of key US economic data later this week, dealers said. Purchasing Managers' Index data is due at 1915 IST on Tuesday, while US non-farm payrolls for August is due after Indian market hours on Friday.

Significant cues to the US rate trajectory are seen guiding domestic interest rate expectations as well, 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 6.43-6.58% and in the five-year segment at 6.00-6.18%.

End

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

Edited by Akul Nishant Akhoury

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