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Informist, Wednesday, Nov. 6, 2024

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended off highs Wednesday as traders unwound their paid fixed rate bets at a profit after the rates shot up following a rise in US Treasury yields, dealers said. US yields rose as Republican candidate Donald Trump, after taking an early lead, was designated the winner in the US presidential race by the Associated Press during market hours.

The one-year swap rate ended at 6.54%, from a high of 6.58%, and against 6.55% on Tuesday. The five-year swap rate settled at 6.32%, against 6.30% the previous trading day. Its notional traded volumes rose to the most in a month as it retreated from 6.37% intraday, highest since Jul. 15.

The yield on the 10-year US Treasury note rose to 4.46% at the end of Indian market hours Wednesday, just off a four-month high, from 4.31% at 1700 IST on Tuesday. Trump's proposed policies are seen as expanding the fiscal deficit and may be inflationary for the US economy, pushing long-term bond yields higher, dealers said. The US Federal Open Market Committee may decide on a higher terminal interest rate, which may also delay or dissuade the Reserve Bank of India's Monetary Policy Committee from cutting rates in the medium-term, dealers said.

"There was quite a straightforward movement in OIS: the US yield is up around 15 basis points, the five-year OIS is up 6-7 bps," a dealer at a primary dealership said. "At some point, the pass-through to OIS rates collapsed due to strong flows on the receiving side."

Traders who had bet on a Trump win and paid fixed rates earlier unwound those bets as the five-year swap rate topped 6.35%, narrowing its spread with the five-year benchmark gilt yield to below 40 bps. In addition to the White House victory, Republicans swept the US Congress as well, which may serve as an impetus to Trump's proposed policies. This is likely to drive up the 10-year US Treasury yield above 6.50% in the next few days, which would push up swap rates more than gilt yields, reducing the spread between the instruments further, dealers said.

"The receiving pressure was from foreign traders unwinding bond swap trades in large volumes," a dealer at a private bank said. "Swaps are likely to follow the rise in US yields much more closely, so it is a good level to unwind trade you had entered at 80 bps or higher spread at the beginning of the year."

On the domestic front, traders assessed comments by RBI Governor Shaktikanta Das at an event in Mumbai. Das said growth signals had become mixed, though they still had more positives than negatives. This was seen as a signal by some traders as an acknowledgement of a growth slowdown. Most dealers said they would wait till India's Jul-Sept GDP data is released at the end of the month to completely rule out a rate cut by the MPC in December.

However, Das' other comments were seen as pushing back rate cut hopes. Das said a change in policy stance, like the one in October, does not necessarily mean a rate cut would follow. Moreover, the RBI governor said that he was not under any pressure from the market to go for a rate cut and reiterated that CPI inflation in October could be higher than September's nine-month high of 5.49%. Traders have already discounted a reading of around 6%, dealers said.

OUTLOOK

On Thursday, swap rates will take cues from the movement of US Treasury yields following the Republican party sweep in an election that was expected to go down to the wire, dealers said. The US FOMC outcome at 0030 IST on Friday is also eyed; the US panel is seen cutting interest rates by 25 bps, which is already discounted by the market.

In addition, traders may take cues from developments in the West Asia conflict. The swap rate in the one-year segment is seen at 6.45-6.65% and in the five-year segment at 6.25-6.42%.

End

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

Edited by Ashish Shirke

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