More Stories

Informist, Wednesday, Sep 11, 2024

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended sharply lower, tracking a fall in US Treasury yields with a focus on the US consumer inflation print, dealers said. Offshore traders aggressively received fixed rates, pulling down the 1-year OIS rate to a two-year low, and the five-year rate to its lowest since May 2023.

The one-year swap rate ended at 6.39%, against 6.44% on Tuesday. The five-year swap rate ended at 5.97%, against 6.05% the previous trading day.

Notional traded volumes on both benchmark swap contracts rose to an over one-month high, hitting volumes last seen at the August meeting of the Reserve Bank of India's Monetary Policy Committee. Offshore traders received fixed rates right from the beginning of the day, and were more aggressive than anticipated from just a fall in US Treasury yields, dealers said. 

The yield of the benchmark US Treasury note fell to 3.63% at 1700 IST, against 3.72% on Tuesday. This was despite US rate-cut expectations not being significantly different from Tuesday. Dealers said this was because traders were taking bets that US CPI data would signal a significant slowdown in price-rise and make a stronger case for a 50-basis-point rate cut by the US Federal Open Market Committee next week.

"The big game people are playing today, is hoping that (US) CPI is going to really underperform," a dealer at a primary dealership said. "The flow that is coming in today is completely one-way, there is no regard that the data is actually yet to come."

The data was released at 1800 IST. US CPI inflation for August came in slightly lower-than-expected, at 2.5% on year against the estimate of 2.6% in a Reuters poll, and July's reading of 2.9%. The index rose 0.2% in August, in line with expectations.

In addition to hopes of lower-than-forecast US CPI, along with a fall in crude oil prices, and the effect of the US presidential debate were a triple-whammy pulling US yields downward, with the 10-year US yield falling below the crucial 3.68% mark, dealers said. Crude prices particularly had a sharp impact on the receiving of fixed rates in OIS, dealers said.

The growth forecast for crude oil demand in 2024 has been trimmed by nearly 100,000 barrels per day to 2.0 mln bpd this year, the Organization of the Petroleum Exporting Countries said in its September Oil Market Report on Tuesday. The cartel sees demand for crude oil in 2025 rising by 1.7 mln bpd, 40,000 bpd lower than the previous month's estimate. Following the report, Brent crude oil futures for November fell below $70 a bbl, the first time since 2021. This pulled down US yields and domestic rates also, as fears of imported inflation eased, dealers said.

The US presidential debate held Tuesday has boosted Democratic Party's nominee Kamala Harris's chance of an electoral victory in November, dealers said. She is expected to be more fiscally prudent than her opponent, Republican challenger Donald Trump, helping with traders' outlook on long-term US Treasury notes. Strong demand at the auction of $58-bln worth of three-year US Treasury notes was also a contributing factor for the fall in US yields, dealers said.

Even though the one-year swap rate slumped, traders said rate cut bets in India remained anchored at a 25-basis-point rate cut in December, dealers said. A section of the market was hoping the MPC would soften its policy stance of "withdrawal of accommodation" at its next meeting in October, but this was not yet a widespread view, they said. 

"There is some froth component to when there are sharp movements in swap rates without any trigger. I don't think there's a sizeable repricing of rate cuts yet in India, such as what the 1-year swap is now showing," a dealer at a private bank said. 

OUTLOOK

On Thursday, swap rates are seen opening higher as traders are likely to unwind their bets from today as the US CPI inflation was marginally lower than expected but not enough to give the market certainty on the quantum of rate cuts in the US in 2024, dealers said.

At 2030 IST, the CME FedWatch tool showed that Fed fund futures reflected a 81% probability, against 56% a week ago, of a 25 bps interest rate cut next week. The expectation of a 50-bps rate cut has shrunk to 19%.

Traders await India CPI data due after market hours on Thursday. Traders will take cues from the India print for a possibility of a change in monetary policy stance in India. India's CPI print for August is seen at 3.6%, the second consecutive month it would have stayed below the RBI's target of 4%, according to an Informist poll.

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 Vidhi Verma

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

Informist Media Tel +91 (11) 4220-1000

Send comments to feedback@informistmedia.com

© Informist Media Pvt. Ltd. 2024. All rights reserved.