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Informist, Thursday, Dec. 19, 2024

By Srijita Bose

MUMBAI – Overnight indexed swap rates rose sharply after the US Federal Open Market Committee halved its rate cut projections for 2025 to 50 basis points from 100 bps earlier. The rise in US Treasury yields after FOMC's decision also pushed up the swap rates, dealers said.

The one-year swap rate ended at 6.54%, up from 6.46% on Wednesday. The five-year swap rate settled at 6.20%, up from 6.10% the previous day. Both swap rates were at their highest since late November.

The US FOMC voted with an 11-1 majority to cut the Fed funds target range by 25 bps to 4.25-4.50%, which traders had already priced in. However, the highly-awaited Summary of Economic Projections, showed higher expected outturns for growth and inflation, leading to the reduction in rate cut guidance. Despite the offshore trigger, offshore traders mostly stayed away from the OIS market after the FOMC outcome as they prepared to close their books before the calendar year-end, dealers said.

"A stop-loss was triggered in the morning on gilts leading to the rise in OIS as well, but 6.18-6.20% (on the 5-year swap) will provide support as long as US yields remain here," a dealer at a primary dealership said. "But if it (yield on the 10-year benchmark US Treasury note) rises to 4.60-4.72% levels, then I don't know what will happen, it (rates on 5-year swap) could cross 6.30% also."

The yield on the 10-year US Treasury note jumped to 4.55% during the day, the highest since May 31, from 4.40% at 1700 IST on Wednesday. US Federal Reserve Chair Jerome Powell said the FOMC could afford to be more cautious in considering further adjustments to its policy rate. This comes on the backdrop of US President-elect Donald Trump taking office on Jan. 20. Trump's policies on tariffs, tax and immigration are seen as inflationary for the US economy, and may drive up US yields further close to his inauguration.

Dealers said slower and fewer rate cuts in the US could potentially delay rate cuts by the Reserve Bank of India's Monetary Policy Committee. Though the MPC is widely expected to begin cutting the repo rate by 25 bps in February, the newly appointed RBI Governor Sanjay Malhotra will have to consider the trade-off between a weakening currency and stimulating India's GDP growth, which fell to a seven-quarter low in Jul-Sept, dealers said.

"There is still no clarity on the domestic front as to when the rate cut cycle will begin, even though the market has already mostly priced in a February cut (by the MPC), so onshore paying is happening because of that," a dealer at a private bank said.

OUTLOOK

On Friday, swap rates will take cues from overnight movement in US yields ahead of the release of the US Personal Consumption Expenditure data for November due post-market hours. Offshore traders are likely to abstain from participating in the swaps market as they prepare to close their books ahead of year-end, dealers said.

Tight liquidity conditions in the banking system may result in upward pressure on short-term swap rates. The swap rate in the one-year segment is seen at 6.48-6.58% and in the five-year segment at 6.15-6.30%.

End

Edited by Saji George Titus

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