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Informist, Tuesday, Nov. 19, 2024

By Cassandra Carvalho

MUMBAI – Overnight indexed swap rates ended lower due to a fall in US Treasury yields, with a large domestic bank unwinding its paid fixed rate bets through the day, dealers said. Traders speculated that the domestic bank received fixed rates to hedge its exposure to a total return swap trade that was being unwound by an offshore entity.

The one-year swap rate ended at 6.53%, against 6.56% on Monday. The five-year swap rate settled at 6.24%, compared to 6.30% the previous trading day.

The sharp fall in the five-year OIS was attributed to a domestic bank unwinding its hedge on a total return swap, as the fall in US yields alone would not spark such a reaction in the domestic swap market, dealers said. Some traders were left surprised by a domestic bank transacting a large chunk of a total return swap trade, that is typically undertaken only by foreign banks. Others said that with foreign banks on the sidelines near the year-end, the activity of a large private bank may have moved the market.

"There is a strong receiving bias in OIS due to high-level receiving (of fixed rates) from a particular large PSU (state-owned bank), because of TRS (total return swap)....Mostly, OIS rates are tracking US yields, but going forward India GDP data will give cues," a trader at a primary dealership said. 

The yield on the 10-year US Treasury note fell to 4.36% at India's market close from 4.47% at 1700 IST on Monday. This was due to a combination of factors. Expectations of a rate cut in December by the European Central Bank led to softening US yields in European market hours, while the major factor was escalation of the Russia-Ukraine conflict, dealers said.

Ukraine attacked Russia with long-range weapons on Tuesday, after US President Joe Biden recently approved the use of US weapons on Russian territory. In retaliation, Russian President Vladimir Putin approved a revised nuclear doctrine, allowing Russia to use nuclear weapons if it were subjected to a conventional missile assault supported by a nuclear-armed state. This raised fears of nuclear war among investors, who shifted to safe haven assets like US debt, dealers said. 

"The paying interest in swap rates has fizzled out, there are no payers," a dealer at a private bank said. "Typically, offshore paying pressure comes in at these levels, but that is also not happening because of (negative expectations on) GDP. We have been seeing similar activity for the last two days."

Traders now look forward to the Jul-Sept GDP growth data next week, hoping for a slower pace of growth than the Reserve Bank of India's forecast, which may prompt quicker rate cuts in India, dealers said. Offshore traders have received fixed rates in swaps on the view that economic growth will miss the RBI's 7% forecast. India's GDP data for the quarter ended September is due at 1600 IST on Nov. 29.

Finance Minister Nirmala Sitharaman's comments on Monday, when she said that bank interest rates would have to be more affordable for industrial growth, were seen as a positive, dealers said. The comments came soon after trade minister Piyush Goyal also called for lower interest rates. Pro-rate cut comments from two cabinet ministers within a week bolstered traders' hopes that the RBI's Monetary Policy Committee would cut the policy repo rate soon, if not in December, then at the most in February, dealers said. 

Separately, monetary policy uncertainty also decreased for the rates market. Quoting three government sources, Reuters reported on Monday that RBI Governor Shaktikanta Das would get at least a one-year extension, and this is likely to be announced post the Maharashtra elections. Policy continuity would be a positive for the market, dealers said.

OUTLOOK

Money markets will be shut on Wednesday due to Maharashtra Assembly elections. On Thursday, swap rates may take cues from the overnight movement in US yields and crude oil prices. Any escalation in the Russia-Ukraine war will be tracked for cues, dealers said.

Traders await the US November flash manufacturing and services purchasing managers' index data, due post market hours on Friday, for cues on the US rate cut trajectory. On the domestic front, India's GDP numbers for the quarter ended September, due at 1600 IST on Nov. 29, will be looked at for cues on the onset of the rate cut cycle by the MPC.

The swap rate in the one-year segment is seen at 6.45-6.63% and in the five-year segment at 6.18-6.33%.

End

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

Edited by Avishek Dutta

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