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Informist, Monday, Oct. 28, 2024

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended higher tracking offshore flows, as the 10-year US Treasury yield jumped to a fresh three-month high intraday, dealers said. The five-year OIS rate continued its steady climb in October, and is now up 29 basis points this month.

The one-year swap rate ended at 6.59%, the highest since early August, against 6.58% on Friday. The five-year swap rate settled at 6.32%, hitting fresh three-month highs, against 6.29% the previous trading day.

"The flow is entirely dependent on models, which have likely realigned after US yields broke a crucial level," a dealer at a primary dealership said. "Our strategy is to sit this one out and wait for the data to come in, because there are wild swings that could happen one day to the next."

The yield on the 10-year US Treasury note climbed to a high of 4.30% intraday, from 4.20% at the end of Indian market hours Friday. Even as the 10-year US yield eased by the market close, dealers said offshore traders paid the five-year OIS rate persistently and in large quantums through the day, with several domestic traders receiving fixed rates.

"Bulk of it is from offshore, and it has not subsided," a dealer at a private bank said. "At this point we thought it would be safer in receiving (fixed rates in OIS), because while we are not very optimistic about the data, these levels shouldn't be missed."

Some traders said the latest developments in the West Asia conflict eased fears of a widespread regional war, which brought down crude oil prices and capped OIS rates, dealers said. Brent crude for December delivery fell around 6% from Friday's close to $71.61 a barrel at 1700 IST. On Saturday, Israel launched strikes at Iran that did not target oil production or nuclear sites. This comes a month after Iran had bombed Israel in retaliation for previous attacks. Iran said its air defences had successfully countered the latest attack, and did not signal further retribution, according to media reports. 

Meanwhile, Republican candidate Donald Trump's odds of winning the US presidential election next week have led to fears of higher government spending, pushing up the 10-year US yield this month. Meanwhile, data has suggested the US Federal Open Market is not likely to cut rates aggressively in the remainder of 2024, dealers said. It had begun its rate easing cycle with a 50-bps rate cut in September.

Moreover, India's Monetary Policy Committee is also unlikely to cut rates in a hurry, keeping traders away from bets in short-term swap rates, dealers said. Currently, the one-year swap rate prices in slightly less than even chance of repo rate cuts by February, with some traders even betting on India's rate cut cycle to last only two MPC meetings, April and June.

OUTLOOK

On Tuesday, 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 on Nov. 5, dealers said.

Traders await US data such as the final Jul-Sept GDP numbers, the October employment report and purchasing managers' indices for cues on the FOMC's interest rate cuts at its meeting outcome.

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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