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Informist, Wednesday, Oct. 16, 2024

By Siddhi Chauhan

MUMBAI – Overnight indexed swap rates maturing up to two years ended steady on a lack of significant domestic cues Wednesday, dealers said. The five-year swap rates eased on the back of a fall in US Treasury yields.

The one-year swap rate ended at 6.47%, unchanged from Tuesday. The five-year swap rate settled at 6.13%, against the previous close of 6.15%.

"There is receiving in the five-year contract because of US yields, but it still hasn't broken the crucial levels of 6.12%," a dealer at a primary dealership said. "This is because there is still some negativity around the fact that the US will only cut 25 basis points (more this year)."

The yield on the 10-year US benchmark note was at the day's low of 4.01% at the end of Indian market hours, against 4.08% Tuesday. On Tuesday, the yield on the benchmark 10-year US Treasury note fell as traders took cues from a policymaker's comments and poor industrial data in New York.

San Francisco Federal Reserve President Mary Daly said Tuesday there is room for the central bank to cut rates further, with the only question being how quickly it would adjust to that level. The Federal Reserve Bank of New York's Empire State Manufacturing Survey came in at (-)11.9 in October, against a reading of 3.0 expected by economists in a poll by The Wall Street Journal.

This reduced fears of the US Federal Open Market Committee holding rates unchanged at its November meeting. According to the CME FedWatch tool, the odds of interest rates remaining unchanged after the next US rate decision fell to 5.8%, from around 20% a week ago. Fed funds futures showed a 94.2% chance of a 25-bps rate cut in November, after the US presidential election in the first week.

Meanwhile, short-term swap rates were steady, and trade died down from Tuesday's levels because of a lack of clarity on the interest rate cut on the domestic front, amid a lack of fresh cues, dealers said. India's CPI inflation for September rose to a nine-month high of 5.49% in September, against 5.1% expected in an Informist Poll. CPI inflation for Jul-Sept averaged 4.2%, against the Reserve Bank of India's projection of 4.1% for the quarter.

A delay in rate cuts by the RBI beyond December has largely been priced in by the market, with the one-year swap now showing only 50 bps of rate cuts in the next 12 months, dealers said. The RBI's Monetary Policy Committee last week softened its policy stance to 'neutral' from 'withdrawal of accommodation', but there was no guarantee it would follow up with a rate cut, dealers said. CPI inflation in October is also expected to be near 5%, and that will be the last inflation print before the MPC meets again in December.

However, some traders are still betting on a December rate cut. Others said there is a small chance of a 50-bps rate cut in February, rather than 25 bps, due to the expected fall in US interest rates by then. The three-month and six-month OIS contracts saw robust volumes.

"Due to much-higher-than-expected CPI inflation data, traders have now shifted their view about rate cuts in December," a dealer at a private bank said. "As a result, they have abandoned 1-year and are punting on the rate-cut expectations in contracts maturing in less than a year." 

OUTLOOK

OIS rates are seen opening steady Thursday due to a lack of significant domestic interest rate cues, dealers said. Movements in US Treasury yields and crude oil prices and developments in West Asia will be keenly tracked. 

US retail sales data for September and weekly unemployment claims, due after market hours Thursday, may also have an impact on swap rates. Activity from offshore traders may be limited ahead of the data point, dealers said.

The swap rate in the one-year segment is seen at 6.40-6.55% and in the five-year segment at 6.05-6.25%.

End

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

Edited by Rajeev Pai

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