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Informist, Friday, Sep 20, 2024

By Siddhi Chauhan

MUMBAI – Overnight indexed swap rates ended steady on lack of fresh significant cues both on the global and domestic fronts, dealers said. During the day, the five-year contract saw onshore traders paying fixed rates.

The one-year swap rate ended at 6.39%, unchanged from Thursday. The five-year swap rate ended at 6.01%, against 5.99% the previous day.

Despite little change in US Treasury yields, traders paid fixed rates on the five-year contract, dealers said. This was because US yields have only climbed despite the US Federal Open Market Committee cutting its policy rate by 50 basis points on Wednesday, which was sharper than some sections of the market expected.

Some traders attributed this momentum to be a result of bond-swap trades, which include paying fixed rates in swap contracts and buying bonds. However, a few dealers refuted the theory by saying that it won't be a lucrative option to undertake between the 10-year gilt and the five-year OIS, dealers said.

"It doesn't seem to be a bond swap because the spread between the 10-year (7.10%, 2034 bond) and five-year contract is not that lucrative as it is giving a return of only 73 basis points," a dealer at a private bank said. "I think it is a delayed reaction to the overall rise in US yields, bond market did react to the overall rise in US yields, but swaps didn't."

The 10-year benchmark US Treasury note rose to 3.74% at the end of Indian market hours today, against 3.71% at the time the Indian market closed on Thursday. However, it has risen from 3.61% at the end of Indian market hours Tuesday, the last level that Indian market participants could trade on before the FOMC. Indian money markets were shut on Wednesday on account of Id-e-Milad.

The one-year contract ended steady as the market was in a schism with respect to the Reserve Bank of India Monetary Policy Committee's decision in its October monetary policy meeting, dealers said. While some traders expect the central bank to change its stance from 'withdrawal of accommodation' to 'neutral' in its next meeting, a few believe the domestic panel will follow the US and cut rates. 

"Market is not sure right now. Some are saying that the RBI may cut rates in October, but I don't agree with them," a dealer at a primary dealership said. "For them to cut rates, inflation should be under control, a higher base effect won't last long. With vegetable prices rising, we don't see it happening anytime soon."

For the central bank to cut rates, the headline inflation should align with the RBI's aim of 4% on a durable basis, according to central officials on the MPC. Governor Shaktikanta Das has said last week that even if the Federal Reserve cuts rates, India's monetary policy wouldn't be impacted and would primarily be guided by domestic factors. Projections do not show inflation reaching its aim even by Apr-Jun of 2025.

OUTLOOK

Swaps are not traded on Saturday. OIS rates may open steady on Monday due to lack of firm domestic and global cues, 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 6.35-6.53% 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 Akul Nishant Akhoury

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