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Informist, Monday, Sep 9, 2024

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended steady today as the US non-farm payrolls data released Friday failed to give direction to the market, dealers said. Traders remained unsure whether the US Federal Open Market Committee would cut rates by 25 or 50 basis points at its policy review next week, they said.

The one-year swap rate ended at 6.46%, against 6.47% on Friday. The five-year swap rate ended at 6.06%, against 6.05% the previous trading day.

Traders have been certain rate cuts in the US are coming, but have been cautious in placing bets on timing and quantum. Already, swap rates have been falling since July as traders gained certainty that the US FOMC would cut rates by at least 25 bps at its policy review next week. Recent commentary from US Federal Reserve officials, including Governor Christopher Waller on Friday, has signalled it was finally time to cut rates after over a year of holding the Fed funds target rate at a two-decade high of 5.25-5.50%. 

While inflation measures in the world's largest economy have moved towards the Fed's 2% target, it is the slowdown in the labour market that has rattled policymakers to guide that they will take action. Traders received fixed rates in the five-year OIS on the view that non-farm payroll data for August would prompt the FOMC to cut rates by 50 bps.

However, the mixed data left traders in limbo between expecting a shallow or sharp rate cycle, the same state as before the data, dealers said. US non-farm payrolls increased by 142,000 in August, lower than the forecast of 160,000 additions by economists in a Reuters poll. The unemployment rate came down to 4.2% in August from 4.3% a month before, and average hourly earnings rose 0.4%, more than expected.

"There may be some passive paying in the market today after non-farm payrolls," a dealer at a private bank said. "No one is going out of their way to pay, but it is a dull day on the whole."

A 50 bps rate cut in the US in September would allow the Reserve Bank of India's Monetary Policy Committee to loosen domestic monetary policy earlier than currently expected without fearing macroeconomic risks, dealers said. Swap rates of up to one-year maturity are fully pricing in a 50 bps rate cut by April or June in India, with outlier estimates of a 75 bps rate cut, they said.

Offshore traders have been receiving fixed rates in both non-deliverable and onshore OIS to increase their exposure to India's rates market ahead of an expected rate cut, starting in December, dealers said. Moreover, with the US on the cusp of rate cuts, risk assets such as India's rate market are a favourite target for offshore flows. The strong inflows in the five-year swap could also percolate to slightly shorter tenures in the coming days, particularly if the US goes ahead with a rate cut next week.

"In my very strong view, we should see a big move down in the two- and three-year swap rates until they become flat with the five-year swap," a dealer at a foreign bank said. 

OUTLOOK

On Tuesday, swap rates are seen opening steady as traders await inflation data for August in India and the US this week. These are likely to provide interest rate cues in both economies, with traders having high expectations of imminent rate cuts, 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 Saji George Titus

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