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Informist, Tuesday, Dec. 17, 2024

By Srijita Bose

MUMBAI – Overnight indexed swap rates ended higher due to a rise in US Treasury yields ahead of the US Federal Open Market Committee's rate decision early on Thursday, dealers said. The one-year swap rate ended at 6.47%, up from 6.46% on Monday. The five-year swap rate settled at 6.13%, up from 6.09% the previous day.

The yield on the 10-year US Treasury note rose to 4.43% at the end of Indian market hours from 4.38% at 1700 IST on Monday. While the US FOMC is expected to cut rates by 25 basis points later this week, traders await the outlook on US rates after the policy. In the Summary of Economic Projections, dealers fear that US Federal Reserve officials would signal only shallow or no rate cuts in 2025.

Earlier in the month, US Federal Reserve Chair Jerome Powell had said that policymakers could move cautiously as they continue lowering interest rates. The policies proposed by US president-elect Donald Trump, seen as inflationary and pushing up the fiscal deficit in the world's largest economy, are also a negative for long-term US bonds. Back in India, traders will be on the lookout for any signs of the Fed cutting back on policy easing.

"The rise in US yields surely gave way to paying pressures in the OIS market, and if it inches up more, it may test 6.18-20% levels (on 5-year swaps). Offers were also fewer today, so the overall less receiving pressure is also leading to the rise, and this is just because of caution before FOMC," a dealer at a private bank said. 

Both onshore and offshore traders are likely to have paid fixed rates on swaps, dealers said. Traders speculated that paying interest from a large corporate entity added to the rise in 5-year swap rate. Dealers said the lack of counterparties interested in receiving fixed rates also led traders to pay higher rates on swaps. 

"In the 5-year segment, some big corporate also paid. People were unwinding their received positions in a panic which created the uptick in swaps," a dealer at a primary dealership said.  

Trade volumes in shorter tenures rose during the day on expectations of liquidity squeezing during the next one month, dealers said. Traders expect tight liquidity to keep the overnight Mumbai Interbank Offer Rate – the fixed leg of the OIS contract – above the policy repo rate of 6.50 and chose to pay.

OUTLOOK

On Wednesday, swap rates will take cues from the overnight movement in US yields before the FOMC's policy statement. A further rise in US yields could lead to traders paying fixed rates, though most traders will refrain from placing aggressive bets before the decision.  

Tight liquidity conditions in the banking system may result in upward pressure on swap rates. The swap rate in the one-year segment is seen at 6.43-6.52% and in the five-year segment at 6.10-6.18%.

End

Edited by Avishek Dutta

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