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Informist, Monday, Oct. 7, 2024

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended higher Monday due to a sharp rise in US Treasury yields after robust US jobs gains in September wiped out hopes of sharp rate cuts in the world's largest economy, dealers said.

The one-year swap rate ended at 6.50% against 6.45% on Friday, the highest closing level since Sept. 3. The five-year swap rate settled at 6.18%, against the previous close of 6.14%, the highest since Aug. 1.

"The reaction in the swap market is entirely dependent on the jump in US yields," a dealer at a private bank said. "There are exogenous factors, a lot of NDOIS (non-deliverable OIS) positioning is being priced out, that is leading to a lot of sensitivity there."

After robust US labour market data, the yield on the 10-year US Treasury note rose to as high as 4.02% during trade from 3.86% at 1700 IST on Friday. Fed funds futures showed expectations of a 50-basis-point rate cut at the next Federal Open Market Committee meeting slumped to nil from 53.3% a week ago, according to the CME FedWatch tool. Odds are now more in favour of a modest 25-bps US rate cut, with an 11.1% chance of no rate cuts at all.

Data on Friday showed US non-farm payrolls rose 254,000 in September, against Dow Jones' estimate of 150,000. Wages grew by a higher-than-expected 4% on year, while the unemployment rate fell to 4.1% in September from 4.2% in August. At the most recent Summary of Economic Projections in September, the median US Federal Reserve official saw the unemployment rate at 4.4% in December, revised upward by 40 basis points from the June projections. This was among the bases for officials guiding for another 50 bps of rate cuts in 2024.

With the US rate-setting panel likely to slow its pace of policy easing, after beginning with a 50-bps rate cut in September, traders turned more cautious on domestic policy softening as well, dealers said. India's Monetary Policy Committee is expected to leave the policy repo rate unchanged at 6.50% on Wednesday for the tenth meeting in a row, although expectations of a change in stance to "neutral" have markedly increased, according to an Informist poll. The committee began its three-day policy review Monday.

The six-member committee was reconstituted last week with three new external members, who will sit in their maiden meeting this week. The government named Delhi School of Economics Director Ram Singh, economist Saugata Bhattacharya, and Institute for Studies in Industrial Development Director and Chief Executive Nagesh Kumar as the MPC's new external members for the next four years. They will replace the outgoing Shashanka Bhide, Ashima Goyal, and Jayanth Varma, who were appointed to the committee on Oct. 5, 2020.

Traders said policy uncertainty plagued the OIS market as two of the three MPC members were unknowns to the market, while Bhattacharya – former chief economist at Axis Bank – was likely to vote for a stance change to neutral at the policy decision. However, bets of a stance change vote by the RBI members of the committee have faded after the recent flare-up in the conflict in West Asia and the accompanying rise in crude oil prices, dealers said.

"The market is not ready to make a choice yet, so OIS is drifting up with US yields," a dealer at a foreign bank said. "I think the RBI can definitely soften the tone of the policy statement, but with the current geopolitical situation, they may opt to change stance along with a rate cut in December." 

Over the weekend, Israel struck targets in the Gaza Strip and Lebanon. Israeli Defence Forces head Herzi Halevi said Hamas' military wing had been defeated a year after the terrorist organisation attacked on Oct. 7, 2023. Meanwhile, US President Joe Biden asked Israel not to strike Iran's oil production facilities in retaliation for strikes by the latter last week.

Despite this, crude oil prices jumped over 8% last week, the biggest weekly jump since January 2023. Brent crude for December delivery remained below $80 a barrel after Biden's call for restraint. Disruptions in the supply of crude oil are likely to be the first fallout of a wider war.

OUTLOOK

OIS rates may open steady on Tuesday sue to caution ahead of the MPC meeting outcome on Wednesday. Traders are split on what to expect from the newly reconstituted panel, with some bets on a change in policy stance to neutral from "withdrawal of accommodation".

Developments in West Asia will also be closely watched, especially their impact on crude prices, dealers said. The swap rate in the one-year segment is seen at 6.40-6.58% and in the five-year segment at 6.10-6.25%.

End

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

Edited by Avishek Dutta

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