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Informist, Thursday, Dec. 26, 2024

By Srijita Bose

MUMBAI – Overnight indexed swap rates inched up owing to a slight rise in US Treasury yields. Lack of participation from offshore traders and foreign banks kept trade volumes muted and limited the rise in rates, dealers said. 

The one-year swap rate ended at 6.53%, up from 6.52% Tuesday. The five-year swap rate settled at 6.23%, up from 6.21% Tuesday. Indian financial markets were closed on Wednesday on account of Christmas. Several traders are on leave between Christmas and New Year, while foreign banks and foreign portfolio investors are closing their accounts at the end of the calendar year, dealers said.

Domestic traders, however, paid fixed rates in five-year swaps as US yields rose, dealers said. The yield on the 10-year benchmark US Treasury note rose to 4.62% from 4.61% at 1700 IST on Tuesday. US yields are expected to rise further as US President-elect Donald Trump assumes office on Jan. 20. Trump's policies on tariffs and taxes are seen as inflationary.

"Traders are just waiting for some clarity on the extent of the rise in US yields and there are so many cues in coming weeks with Trump coming, liquidity easing and demand from foreign investors in the new year," a dealer at a private bank said. "So right now, the market is just taking a pause before coming back in full swing at the beginning of the year."

Trade volumes on short-tenure contracts rose during the day. Dealers said that volumes on the 1-year contract rose as traders hedged their bets after picking up treasury bills at the auction. Some traders also likely traded in the yield spread between the 364-day T-bill and the one-year OIS, dealers said. The RBI set the cut-off yield on the 364-day T-bill at auction at 6.69% at auction Thursday, 16 bps above the one-year OIS rate.

"I think apart from just spread trades, some offshore traders who have taken a position in currency-forward are also paying in OIS (contracts) maturing up to one year, against their hedge in MIBOR (Mumbai Interbank Offer Rate) swaps," a dealer at a primary dealership said. "But mostly offshore traders are very minimal, which is why rates are not rising as much."

OUTLOOK

On Friday, swap rates will take cues from the movement in US yields on lack of domestic cues, dealers said. The movement of US yields after the release of initial jobless claims data for the week ended Saturday will give cues to rates on Friday.

Trade volumes could be low during the week as several traders are 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

Edited by Saji George Titus

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