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Informist, Monday, Sep 16, 2024

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended steady today due to a lack of fresh cues on interest rates. Traders await the US Federal Open Market Committee meeting outcome on Wednesday for the next big trigger on interest rates, dealers said.

The one-year swap rate ended at 6.37%, against 6.38% at Friday's close. The five-year swap rate ended at 5.95%, from 5.96% the previous day.

Traders have been increasing their bets on a 50-basis-point rate cut in the US over the past few days. A cut of that quantum would continue to push OIS rates lower, despite the one-year swap hovering near two-year lows and the five-year contract at its lowest since May 2023, dealers said. However, there was not enough momentum to pull down OIS rates further because of lack of a fresh trigger. The one-year OIS rate has fallen 12 basis points so far in September, while the five-year swap rate is 13 bps lower.

"The people who want to take positions into FOMC are already heavily received (betting on OIS rates to fall)," a dealer at a primary dealership said. "The market is coiled like a spring waiting for the FOMC to play out."

The yield on US Treasury notes maturing under two years fell on Friday due to increasing bets on sharper US rate cut. Currently, the CME FedWatch tool shows Fed fund futures' expectations of a 50-bps rate cut at 59%, against only 30% a week ago, while the remaining priced in a 25-bps rate cut. Dealers said that even if the Fed in September did not cut rates by 50 bps, the pace of further rate cuts would be closely tracked, Fed funds futures indicated around 100 bps of rate cuts in 2024. Along with the policy outcome, Fed officials will give out a summary of their economic projections on interest rates, growth and inflation along with the rate decision.

"There was some receiving, because the two-year US yield fell by a bit as 50-bps rate cut expectations have increased," a dealer at a foreign bank said. "Other than that, it was not a very exciting day, volumes were low."

In addition to the highly anticipated US monetary policy outcome, other central banks including the Bank of England and the Bank of Japan will also announce rate decisions this week, which has kept some offshore traders on the sidelines, dealers said. Trade volumes were also lacklustre due to a shift in a market holiday, they said. Several OIS traders were on leave today in the domestic market.

The government securities market, foreign exchange market, money market, and rupee interest rate derivatives market were operational today and will remain shut on Wednesday, according to an RBI notification over the weekend. This comes against the backdrop of the government of Maharashtra shifting the public holiday for Id-e-Milad to Wednesday from today. 

However, there was no change in the settlement of secondary market transactions in money markets, including OIS. This led to some settlement issues with swap contracts maturing today having coupon payments, but settlements on Tuesday. This added to paperwork on the day and may have contributed to the dull volumes, but did not affect OIS rates, dealers said. 

OUTLOOK

Swap rates are seen opening steady on Tuesday, with all eyes on the FOMC's rate decision on Wednesday, dealers said. Fed funds futures show a greater likelihood of a 50-bps rate cut instead of 25 bps, according to the CME FedWatch tool. 

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 6.35-6.53% and in the five-year segment at 5.90-6.10%.

End

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

Edited by Aditya Sakorkar

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