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Informist, Friday, Dec. 20, 2024

By Cassandra Carvalho

MUMBAI – Overnight indexed swap rates ended higher, tracking an overnight rise in US Treasury yields, dealers said. Traders also paid fixed rates due to caution before key US inflation data after market hours.

The one-year swap rate ended at 6.55%, up from 6.54% on Thursday. The five-year swap rate settled at 6.23%, higher than 6.20% the previous day. 

The yield on the 10-year US Treasury note rose to a seven-month high Friday, and was at 4.56% at 1700 IST, due to the Federal Open Market Committee's revised rate cut guidance, and amid ongoing negotiations on a spending bill in the US Congress.

"Traders are paying because of fully accessible route flows (from offshore clients), but everyone's just hedging their bond buys and other investments because OIS is the best tool to hedge," a dealer at a private bank said. 

Traders hedged their underlying bond holdings before the US core personal consumption expenditure data, which is the US Federal Reserve's preferred inflation gauge, dealers said. A poll by The Wall Street Journal estimated the gauge to have risen 2.9% on year in November. A reading on the higher end could cement the US FOMC's revised guidance of only 50 bps of rate cuts next year, dealers said. The data, released post market hours, showed the index rose 2.8% on year.

Traders also refrained from entering swap contracts in tenures under one year as the overnight Mumbai Interbank Offer Rate – the floating leg of the OIS contract – was at 6.89%, the highest since Mar. 28. The one-month and two-month contracts were not traded during the day, and only one trade was conducted in the three-month contract. 

"When MIBOR is so high, it poses as a carry negative trade, so traders will want to pay fixed rates and receive MIBOR," a dealer at a primary dealership said. 

OUTLOOK

The swaps market is shut on Saturday. On Monday, swap rates will take cues from the movement in US yields after the release of the US personal consumption expenditure data for November. Core personal consumption expenditure inflation -- the US Federal Reserve's preferred inflation gauge -- was 2.8% on year in November, against 2.9% expected in a survey by The Wall Street Journal.

Comments by MPC members in the minutes for December would also be assessed for direction, dealers said. Two external members -- Nagesh Kumar and Ram Singh, who also voted for a 25-bps cut at the December meeting, spoke along pro-rate cut lines, while the third external member Saugata Bhattacharya's comments sided with status quo on rates. 

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 6.45-6.65% and in the five-year segment at 6.15-6.30%.

End

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

Edited by Avishek Dutta

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