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Informist, Monday, Dec. 16, 2024

By Cassandra Carvalho

MUMBAI – Overnight indexed swap rates ended higher as traders paid fixed rates tracking an overnight rise in US Treasury yields. The one-year swap rate ended at 6.46%, compared to 6.41% Friday. The five-year swap rate settled at 6.09%, compared to 6.04% the previous day.

The yield on the 10-year US Treasury note rose to 4.38% at the end of Indian market hours Monday from 4.33% at 1700 IST Friday. While the US Federal Open Market Committee is expected to cut rates by 25 basis points later this week, the outlook on US rates after the December policy is key. In the Summary of Economic Projections, US Federal Reserve officials are expected to forecast a quicker end to rate cuts than previously anticipated, while signalling resilient growth and higher inflation. The rate decision, and projections, are scheduled for release early Thursday. 

"We know the Fed (FOMC) is going to cut (rates) this week, but with (US President-elect Donald) Trump coming to power in January and the strengthening dollar, everyone is anxious about the rate cuts next year," a dealer at a private bank said. 

Some traders unwound their received fixed rate bets as US yields continued to rise, and due to the uncertainty over global rates. Trump's proposed policies are seen pushing up US inflation, reducing the scope for further rate cuts in the world's largest economy. This may also prevent sharp rate cuts in India, dealers said.

Traders also hedged their underlying rupee-denominated assets in the one-year swap rate. Domestic funding costs, including the overnight Mumbai Interbank Offer Rate - the floating leg of the OIS contract - rose, pushing up swap rates as well, dealers said. The overnight MIBOR rate was set at 6.79% Monday, while the one-year swap rate was at 6.41% at the day's low.

"Paying right now is a carry-positive trade, there's some practical hedging going on," a dealer at another private bank said.

Offshore traders were largely absent from the OIS market ahead of the US monetary policy outcome, dealers said. At the same time, the expectation of repo rate cuts in India starting in February limited the rise in swap rates.

OUTLOOK

On Tuesday, swap rates will take cues from the overnight movement in US yields after the release of the US Flash Manufacturing and Services Purchasing Managers' Index, dealers said. The data will be the last major data point available to the FOMC before it begins its two-day meeting Tuesday.

Domestic traders will also look out for further news on geopolitical tensions, dealers said. The swap rate in the one-year segment is seen at 6.43-6.49% and in the five-year segment at 6.06-6.12%.

End

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

Edited by Tanima Banerjee

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