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Informist, Monday, Dec. 9, 2024

By Srijita Bose

MUMBAI – Overnight indexed swap rates ended lower on Monday due to a fall in US Treasury yields after data released Friday showed an uptick in the US unemployment rate last month, dealers said. Expectations of rate cuts by the Reserve Bank of India in February also dragged swap rates down.

The one-year swap rate ended at 6.40%, against 6.44% on Friday. The five-year swap rate settled at 6.02%, compared to 6.08% on Friday.

The yield on the 10-year US Treasury note fell to 4.14% during the day from 4.18% at 1700 IST on Friday. US yields fell after the unemployment rate in November rose to 4.2% from 4.1% a month earlier. The US employment report for November, released after Indian market hours on Friday, showed non-farm payrolls rose higher than expected at 227,000 against a Dow Jones consensus of 214,000, making the case for the US Federal Open Market Committee to cut rates by 25 basis points at its meeting later this month. The CME FedWatch tool currently shows over 87% of Fed fund futures expecting a rate cut while the rest expect a status-quo on rates.

Offshore traders received fixed rates in the OIS market due to the fall in US yields, dealers said. Traders expected a further fall in US yields with the 10-year benchmark Treasury note testing a 4.0% yield level if the US CPI, due Wednesday, is lower ahead of the Federal Open Market Committee's meeting this month, dealers said.

Another supportive factor was that US President-elect Donald Trump said he would not replace Federal Reserve Chair Jerome Powell when he assumes office, walking back on a comment he made on the campaign trail. This gave traders some reassurance that the Republican may not be planning inflationary policies, dealers said. 

"There was some offshore receiving flow likely from foreign banks as they also bought gilts, but for the shorter-end papers there was likely some unwinding happening after the MPC," a dealer at a private bank said. "Trump continuing with Powell also shows that he might not be as aggressive as his first term, which was a confidence boost for traders."

On the domestic front, traders anxiously awaited any news regarding RBI Governor Shaktikanta Das' tenure which ends on Tuesday. The announcement of either an extension of his tenure or the appointment of a successor would lend direction to swap rates, dealers said. Because of Das's steadfast resolve to bring down inflation and his unwillingness to look through the volatility in food prices, an extension of his tenure would make for a less benign interest rate outlook, dealers said. As the day progressed, traders speculated that if Das's term was being extended, the government would have made the announcement by now, and the delay implied a possible change of command at the RBI. After market hours, the government announced the appointment of Revenue Secretary Sanjay Malhotra as the next RBI chief.

"Apart from foreign banks, there was also some receiving bias from domestic traders on the view that MPC will now cut rates in February. Expectations of a new RBI governor at the helm who will cut rates also boosted swap volumes across different segments," a dealer at a primary dealership said.

Volumes in the nine-month and the two-year derivatives increased during the day. Dealers said there was a shift from the longer-end swaps to the shorter-end as some traders bet on a rate cut at the Monetary Policy Committee's next meeting scheduled in February.

Some traders had expected a 25-bps cut in the repo rate at the RBI's policy review on Friday, where the central bank maintained status quo but reduced the cash reserve ratio by 50 bps. While some dealers were disappointed as this was the only action taken by the RBI, others said that the move hinted that the RBI was now more anchored towards a rate cut in the near future. Now, most traders expect rates to be cut at the next MPC meeting.

OUTLOOK

On Tuesday, swap rates may open lower following the government's announcement of the next RBI governor. Given that Malhotra is currently serving in the finance ministry, market players expect him to be more amenable towards supporting the government's growth agenda by lowering interest rates. 

"The market is still assessing the news, but the appointment of the revenue secretary will usually mean that he will pay more heed to the government's calls for a cut in borrowing rates, so rate cut possibilities will now increase," a dealer at a private bank said. 

Swaps may also take cues from the movement of US yields before the US CPI inflation data Wednesday, dealers said. Domestic traders will also look out for global developments, and the movement of crude oil prices, dealers said. The swap rate in the one-year segment is seen at 6.30-6.42% and in the five-year segment at 5.95-6.10%.

End

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

Edited by Ashish Shirke

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