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Informist, Thursday, Sep 5, 2024

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended lower today due to a fall in US Treasury yields on heightened hopes of an aggressive rate cut cycle in the world's largest economy, dealers said.

The one-year swap rate ended at 6.46%, against 6.49% on Wednesday. The five-year swap rate ended at 6.06%, against 6.08% the previous trading day.

Domestic traders unwound their paid fixed rate bets, anticipating the rate cuts would also influence the Reserve Bank of India to cut policy rates, despite constant commentary from RBI Governor Shaktikanta Das pushing back on the same. A streak of softer-than-expected data on labour and output has raised expectations that the Federal Open Market Committee would cut rates by a larger quantum at its next policy meeting this month, dealers said.

"Domestic (traders) were cutting positions, and foreign banks would have been receiving," a dealer at a private bank said. "There were a lot of paid positions domestically, not just for hedging, but also taking the other side of the trade."

US yields fell as investors assessed jobs openings data, which fell to a three-and-a-half year low in July. US job openings fell by 237,000 to 7.67 mln in July, the lowest level since January 2021, according to the Bureau of Labor Statistics in its Job Openings and Labor Turnover Survey on Wednesday. A Reuters poll of economists had projected job openings to be 8.10 mln.

The June reading was also revised lower. While a fall in US job openings by itself may not be a warning sign for the labour market and economy, the low nonfarm payrolls number for July suggested that job openings were falling even as workers were not actively filling those posts, dealers said.

On Wednesday, Raphael Bostic, president of the Federal Reserve Bank of Atlanta, said the Federal Reserve should not maintain high interest rates for an extended period as it could negatively impact employment. He said he would not need to wait until inflation hit the Fed's target of 2%.

The yield on the 10-year US Treasury note fell to 3.77% at the end of Indian market hours from 3.82% on Wednesday. Odds of a 50-basis-point rate cut in the US had risen to 41% at 1700 IST, up from around 30% earlier this week, according to Fed funds futures on the CME FedWatch tool. The remainder of the expectations are of a more moderate 25-bps rate cut.

While the chances of a 50-bps rate cut in the US rose day-by-day, dealers said rate expectations will undergo a final reset only after the US non-farm payrolls data for August, due after Indian market hours on Friday. Bets on the change in the US rate view were not large ahead of the US private payrolls print for August, scheduled after market hours, dealers said.

"There was not much offshore receiving today, like there was yesterday (Wednesday)," a dealer at a foreign bank said. "Post non-farm payrolls, two US Fed officials will speak, and that is likely to set the tone for what the market will do until FOMC."

OUTLOOK

OIS rates are seen opening steady on Friday on caution ahead of US non-farm payrolls data for August, seen as a key trigger for the FOMC's rate decision later this month. A string of weak jobs data recently has raised expectations of the FOMC cutting rates more aggressively than previously thought, dealers said. 

Today, US ADP data showed that private jobs rose by 99,000 in August, below expectations of 145,000 private jobs added. However, initial jobless claims in the US for the week ended Saturday were 227,000, lower from the previous week and below the market consensus. With the mixed data, fresh bets on rate cuts are not likely to be taken until August's non-farm payroll data is out, 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 6.43-6.53% and in the five-year segment at 6.00-6.12%.

End

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

Edited by Aditya Sakorkar

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