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Informist, Friday, Nov. 8, 2024

By Cassandra Carvalho

MUMBAI – The five-year overnight indexed swap rate fell as US Treasury yields tumbled after the Federal Open Market Committee cut the Fed funds target rate by 25 basis points to 4.50-4.75%. The one-year swap rate only inched lower as expectations on India's rate cut cycle did not change post the FOMC outcome, dealers said.

The one-year swap rate ended at 6.51%, against 6.53% Thursday. The five-year swap rate settled at 6.23%, against 6.30% the previous trading day.

Overnight indexed swaps closely tracked a fall in US Treasury yields due to lack of any domestic cues. The yield on the 10-year benchmark US Treasury note fell to 4.31% at 1700 IST from 4.45% at the same time Thursday. After the Fed rate cut, which was widely expected, Federal Reserve Chair Jerome Powell said Donald Trump's win in the US presidential election would have no immediate impact on the FOMC's rate decisions.

Some traders also received fixed rates in the five-year OIS and placed short bets in the five- and 10-year government bonds, betting that the spreads between the two would increase, dealers said. They termed this a "reverse bond-swap". Other traders said this was an unwinding of prior bets on the spreads decreasing.

"Traders could be betting on increasing spreads between the (yield on) the 10-year, and the five-year swap rate," a dealer at a private bank said.

The FOMC statement said that inflation "made progress toward the committee's 2% objective" but remained "somewhat elevated". The general market view was that a Trump administration would see higher fiscal spending and the imposition of tariffs, which would be inflationary and push back US rate cuts, but Powell's comments quelled those concerns for now, dealers said. Powell said that the FOMC would consider policy decisions made by the new US government only when those are announced or implemented. Traders will consider these comments, in addition to incoming US data, to assess a December rate cut in the US, dealers said.

Meanwhile, domestic rate cuts are only seen in February, instead of the Monetary Policy Committee's next meeting in December, dealers said. India's October CPI inflation print, the last major inflation data before the next MPC meeting, is due Tuesday. Headline consumer inflation is seen at a 14-month high of 5.9% in October, according to an Informist poll of 20 economists, well above the Reserve Bank of India's target of 4% and just below the upper end of the target band.

A lower print along with a lower Jul-Sept GDP could influence the Monetary Policy Committee to cut rates as early as December, against the widely expected February. However, if CPI inflation substantially tops 6%, rate cuts are likely to be completely off the table at the MPC's next meeting, dealers said.

OUTLOOK

The swap market is shut on Saturday. On Monday, swap rates will take cues from the movement of US Treasury yields, crude oil prices and any geopolitical cues over the weekend, dealers said.

The swap rate in the one-year segment is seen at 6.43-6.60% and in the five-year segment at 6.20-6.40.

End

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

Edited by Saji George Titus

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