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Informist, Friday, Sep 27, 2024

By Siddhi Chauhan

MUMBAI – Overnight indexed swap rates rose Friday as domestic traders paid fixed rates to protect their underlying government bond holdings, dealers said. The rise in the one-year contract was limited, which has generally been the case due to uncertainty regarding rate cuts in India, dealers said. 

The one-year swap rate ended at 6.38%, against 6.36% on Thursday. The five-year swap rate ended at 6.03% against 5.99% at the previous close.

After lacklustre trade in the previous trading session, the swap market came to life. Bond yields rose after the government did not cut its borrowing for the financial year 2024-25 (Apr-Mar), belying market expectations. The 10-year benchmark yield rose by 4 basis points, the most since Jun 4, to 6.76%. Traders sold gilts and paid fixed rates on OIS contracts.

"Paying pressure is there today in OIS, the volumes are also quite good," a dealer at a private bank said. "G-sec (government security) market has fallen... so traders are hedging in the OIS market."

Some traders also unwound their fixed rate bets ahead of the US Personal Consumption Expenditures Price Index for August. "Some traders were already on the receiving side...," a dealer at another private bank said. "Now they are just squaring off their bets by paying."

The US personal consumption expenditures data for August, which was released at 1800 IST, was closely watched by traders. US yields were little changed ahead of the release of the data as traders await clarity about rate cuts in the US. Fed funds futures showed a nearly even split in expectations between a 50 bps rate cut and a 25 bps cut in the November outcome of the Federal Open Market Committee meeting, according to the CME FedWatch tool.

Meanwhile, the timeline and probability of the Reserve Bank of India's Monetary Policy Committee cutting rates remain unclear. It raised the policy repo rate by 250 bps to 6.50% between May 2022 and February 2023, and has held it there since. A series of rate cuts beginning in the next three months has already been priced into swaps, with the benchmark one-year OIS rate pricing in a cut of nearly 75 bps over the next year, starting in December, dealers said.

OUTLOOK

Swap markets are shut Saturday. OIS rates may take cues from movement in US Treasury yields and crude oil prices, dealers said.

The US Personal Consumption Expenditures Price Index growth fell to 2.2% in August, against 2.3% on year expected by Dow Jones, and down from 2.5% in July. The index rose 2.7% on year in August, in line with expectations.

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 Rajeev Pai

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