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Informist, Tuesday, Dec. 24, 2024

By Srijita Bose

MUMBAI – Overnight indexed swap rates inched up owing to an overnight rise in US Treasury yields, dealers said. Lack of participation from offshore traders and foreign banks, as traders were on leave for Christmas, led to low volatility and muted trade volumes.

The one-year swap rate ended at 6.52%, against 6.51% Monday. The five-year swap rate settled at 6.21%, against 6.19% the previous day.

The yield on the 10-year US Treasury note rose to 4.61% at 1700 IST from 4.52% at the same time Monday, hitting a seven-month high. Despite US consumer confidence in December being lower than expected, US yields rose before president-elect Donald Trump assumes office in January, as he is expected to impose tariffs and tax cuts, which in turn could lead to a rise in inflation in the US. The yield on the 10-year US Treasury note also rose after the most recent quarterly projections by US Federal Reserve officials--colloquially, the dot plot--saw them halve their estimate for the size of rate cuts in 2025.

Most offshore traders remained absent from the market and trading volumes remained muted as it was Christmas Eve and the year-end closing of foreign banks' accounts loomed. Domestic traders also remained on the sidelines, watchful as the new year is expected to bring significant uncertainty both on the global and the domestic fronts, dealers said.

"It is a good receiving level, the rise in OIS has already happened and the domestic view on a rate cut in February (by the Reserve Bank of India's Monetary Policy Committee) still holds. The only downside is the rise in US yields, and if it goes to 4.70%, then a sharp rise is seen in OIS (five-year rate) above 6.30%," a dealer at a private bank said.

Dealers said a large corporate entity entered into a bond-swap trade, betting on the spread between the five-year gilt yield and five-year swap rate narrowing. The corporate house bought the five-year gilt and paid fixed rates in the five-year OIS contract. Dealers said the trade was probably entered into as positive supply-demand dynamics will limit the rise in gilt yields, while OIS rates are much more sensitive to US yields potentially climbing after Trump's inauguration on Jan. 20.

"I heard (a large corporate house) entered into bond-swaps now, which is what was keeping the paying pressure in OIS," a dealer at a primary dealership said. "Of course, the rise in US yields also resulted in the rise, but if offshore players were there, the rise would have been much more."

Meanwhile, the outlook for near-term swap rates brightened, dealers said. The high overnight Mumbai Interbank Offer Rate--the floating leg of the OIS contract--is likely to ease slightly in the coming weeks, they said. The overnight MIBOR was pegged at 6.86% Tuesday, above the Marginal Standing Facility rate for the 11th straight session. Dealers said the government's month-end spending and the INR 600 billion liquidity injection from the second tranche of a cash reserve ratio cut would help to ease the MIBOR by Saturday, which may pull down rates on swaps maturing in up to three months.

OUTLOOK

India's financial markets are shut Wednesday for Christmas. On Thursday, swap rates will take cues from the movement in US yields on lack of domestic cues, dealers said.

Trade volumes could be low during the week as several traders will be on leave in a Christmas-shortened week ahead of the New Year. Activity from foreign banks and foreign portfolio investors could also be muted as they close their accounts at the end of the year, 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 6.45-6.65% 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 Rajeev Pai

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