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Informist, Friday, Oct. 25, 202

By Siddhi Chauhan

MUMBAI – Overnight indexed swap rates ended higher as offshore traders were jittery heading into the US elections on Nov. 5, and paid fixed rates in India, dealers said. A recovery of the 10-year US Treasury yield from lows also added to the pressure.

The one-year swap rate ended at 6.58%, the highest since early August, against 6.54% on Thursday. The five-year swap rate settled at 6.29%, a three-month high, against 6.24% the previous day,

"The bias today (Friday) is more towards the paying side. In the morning, the market was lower because US yields had fallen but now that they have started to rise, we are seeing paying again," a dealer at a private bank said. The 10-year US Treasury yield rose to 4.20% by the end of Indian market hours, after falling to a low of 4.18% intraday.

"Some bond swaps also happened during the day ahead of the gilts auction," the dealer said. The government sold INR 320 billion worth of gilts at auction at 1030-1130 IST, and traders paid fixed rates in the five-year swap while selling 10-year government bond, dealers said.

Foreign portfolio investors are unwinding a trade that was their preferred way of accessing India's government bond market in 2024, reducing risk ahead of the US presidential election. Total return swaps have been in vogue ever since the announcement of India's inclusion in global bond indices as the derivative offers offshore traders an opportunity to gain exposure to domestic bonds without getting through cumbersome regulations for onshore registrations.

"FPIs' exotic purchases weighed on OIS market and TRS (total return swaps)," a dealer at a primary dealership said. "They've been unwinding a lot before the US election." 

The unwinding of these trades was gradual at first, but has accelerated over the past week as odds of Republican candidate Donald Trump's victory in the US election, considered an unfavourable outcome for risk assets, have risen, dealers said. Trump's policies are expected to drive up the 10-year US Treasury yield if he wins the election, leading to a "Trump-premium" in US Treasuries.

Increasing odds of a victory for Trump have led the 10-year US Treasury note to break a 200-day moving average earlier this week; it rose to a three-month high early on Thursday. The latest Wall Street Journal poll surveyed 1,500 registered US voters from Oct. 19-22 and found that Trump leads Vice President Kamala Harris 47% to 45%, within the margin of error but still in the lead.

OUTLOOK

OIS rates are not traded on Saturday. On Monday, swap rates are seen taking cues from the movement of US Treasury yields and crude oil prices. Traders may closely watch for further cues on the outcome of the US elections, dealers said.

In addition, developments in West Asia will be keenly tracked. The swap rate in the one-year segment is seen at 6.45-6.62% and in the five-year segment at 6.12-6.30%.

End

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

Edited by Manisha Baxla

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