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Informist, Monday, Nov. 25, 2024

By Srijita Bose

MUMBAI – Overnight indexed swap rates ended lower as US Treasury yields fell over the weekend. The five-year swap rate slumped more than other contracts with a surge in volumes as a state-owned power company likely received fixed rates to hedge its upcoming bond issuance, dealers said.

The one-year swap rate ended at 6.53%, against 6.56% on Friday. The five-year swap rate settled at 6.21%, compared to 6.26% on Friday.

At the market open, swap rates tracked the fall in US yields over the weekend. The yield on the 10-year benchmark US Treasury note fell to 4.33% during the day, from 4.39% at the close of Indian market hours Friday as investors welcomed US President-elect Donald Trump's pick for Secretary of Treasury, Scott Bessent. Bessent is considered tough on inflation and market-friendly. Increasing odds of a sharp rate cut in Europe in December also pulled down US yields.

"The kind of volume we saw is really big and some single large power finance company is receiving swaps to hedge against their corporate borrowing," a dealer at a primary dealership said. "Also, US yields have softened and there is some front running which we can see from the liquidity in new 10-year (6.79%, 2034) gilt today (Monday)."

The fall in US yields led to foreign portfolio investors and foreign banks likely buying government bonds during the day, thereby hedging their bets in swaps, dealers said. Traders, however, found the 5-year swap rates more lucrative and traded in light volumes on other shorter-tenure swaps except the six-month derivative. 

"The overnight MIBOR rate is also high, so people won't be able to recover costs in small segments, so they are taking a duration view and the five-year (swap) is the most liquid point," a dealer at a private bank said. "Provided that US yields are well-behaved during the week, then (the five-year) swap could also inch down near 6.13% levels."

Dealers said that positive cues in the market ahead of India's GDP data for the quarter ended September on Friday could lead to a steady fall in swap rates provided the US 10-year yield remains below 4.40%. The data, which is due to be released at 1600 IST on Friday, could provide a fresh rate-cut view to traders who widely expect the data to come below the Reserve Bank of India's forecast of 7%. Though most dealers expect the Monetary Policy Committee to cut rates at the earliest only in February, they said that if the GDP print is below or near 6%, chances of a December rate cut could resurface.

"I am willing to go long at this point ahead of the GDP data as it is most likely to come below (the forecast), but some hedging is surely there in case it comes at 6.6%-6.8% or more," the dealer at the private bank said.

Traders are watchful ahead of key economic data due this week. Estimates for US GDP growth and Personal Consumption Expenditure data for October, the Federal Reserve's preferred inflation gauge, will be watched. The November US Federal Open Market Committee's meeting minutes will also be released later this week. These could lead to some volatility in swaps during the week, though the impact may be limited as activity from foreign banks in Indian markets has decreased near the year-end, dealers said.

OUTLOOK

On Tuesday, swap rates may take cues from the movement of US Treasury yields and crude oil prices. Domestic traders will look out for further news on geopolitical tensions both in the Russia-Ukraine conflict and in West Asia, dealers said. Iran-backed Hezbollah and Israel continued to attack each other on the weekend.

Several US data points are due to be released this week, which will lend cues on the US rate trajectory, dealers said. On the domestic front, India's GDP numbers for the quarter ended September will be looked at for cues on the likely trajectory of the domestic rate cut cycle.

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 Saji George Titus

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