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Informist, Wednesday, Sep 4, 2024

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended lower due to increased hopes of sharp rate cuts in the US following lower-than-expected purchasing managers' index readings released after market hours Tuesday. US Treasury yields fell and offshore traders aggressively received fixed rates in the five-year OIS contract, dealers said.

The one-year swap rate ended at 6.49%, against 6.51% on Tuesday. The five-year swap rate ended at 6.08%, against 6.13% the previous trading day.

Odds of a 50-basis-point rate cut by the US Federal Open Market Committee in September today rose to around 40%, the most since mid-August. While the majority still favoured a more moderate 25-bps rate cut, continued weakness in the US economy boded well for a significant rate cut cycle in the US, dealers said.

The yield on the 10-year US Treasury note fell to 3.83% at the end of Indian market hours today from 3.92% on Tuesday, after US manufacturing Purchasing Managers' Index data came in lower than expected. China's PMI data was also lower than the market's estimates, and heightened fears of a global economic slowdown.

Following the poor expectation from the manufacturing sector in the world's two largest economies, there was a broad sell-off in commodities, including crude oil. Brent crude for November delivery fell to as low as $72.63 a barrel today, levels last seen in December, from $75.85 a bbl at the end of Indian market hours on Tuesday. 

"There's a clutch of non-deliverable OIS traders which are very sensitive to crude prices and the impact on India," a dealer at a primary dealership said. "Those guys were also active today, and received (fixed rates in) small chunks through the day."

The US S&P Manufacturing PMI printed at 47.9 in August, against a flash print of 48.0 and a final reading of 49.6 in July. The Institute of Supply Management's report on business manufacturing PMI printed at 47.2, against 47.9 expected in a Dow Jones poll. Reading of some sub-indices such as new orders was even poorer. A reading above 50 denotes expansion in activity, while a print below 50 indicates contraction.

The fall in swap rates of up to one-year tenures were more limited as traders awaited the actual US rate cuts before placing aggressive rate cuts bets on India's rate trajectory, dealers said. Cuts in India's policy repo rate of 6.50% were not likely, and even then, most of the market expected a moderation in policy rates not exceeding 75 bps. Currently, the nine-month and one-year swap rates are almost completely pricing in a 50-bps rate cut in 2024-25 (Apr-Mar).

"The volumes will tell you the entire story. When there is an offshore trigger, we are not really realigning the expectations on India's rate cuts wholeheartedly," a dealer at a foreign bank said. "It is just an incremental difference."

OUTLOOK

OIS rates are seen opening lower Thursday as job openings in the US fell to an over three-year low in July, suggesting a weakening in the labour market and the economy in general, dealers said. This raised hopes of sharper rate cuts by the FOMC at its upcoming rate decision on Sep 18.

Data released after market hours showed US job opening fell to 7.7 mln in July, the lowest since January 2021. The CME FedWatch tool showed expectations of a 50-bps rate cut rose to nearly half, from around 30% earlier this week. The remainder still favoured a more moderate 25-bps rate cut.

US weekly jobless claims on Thursday and non-farm payrolls data for August, due after Indian market hours Friday, are now awaited. 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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