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Informist, Wednesday, Jan. 1, 2025

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended on a mixed note, reversing some of Tuesday's movement across tenures. Traders received short-term swap rates as liquidity conditions eased, while the five-year swap was paid due to a rise in US Treasury yields, dealers said.

The one-year swap rate ended at 6.52%, against 6.51% on Tuesday. The five-year swap rate settled at 6.24%, against 6.20% the previous day. 

The yield on the 10-year US Treasury note settled at 4.58% from 4.52% at 1700 IST Tuesday. The grim outlook for fixed income in the new year--a slower rate-cut cycle by the US Federal Open Market Committee and US President-elect Donald Trump's likely inflationary economic policies--pushed up long-term Treasury yields.

Volumes were scant on scattered participation, particularly from offshore traders, with most global markets shut on New Year's Day. The notional traded value of the five-year OIS on Clearing Corp. of India's Anonymous System for Trading in Rupee OTC Interest Rate Derivatives was only INR 8.90 billion, the lowest in over a year.

"I'm not the only one in the market today, but I don't have too many friends either," a dealer at a foreign bank said. "The impact of US yields was slightly more than I expected, but since there were no volumes today (in the five-year OIS), the levels could change when activity improves tomorrow (Thursday)."

Meanwhile, traders were keen to receive fixed rates in swaps maturing in less than six months as liquidity pressures in the banking system eased, bringing down the Mumbai Interbank Offer Rate. The overnight MIBOR--the floating leg of the OIS contract--fell to 6.60% from 7.15% on Tuesday, the last day of the December quarter. The liquidity deficit in the banking system narrowed to INR 1.32 trillion on Tuesday from INR 2.06 trillion Monday, and government spending is expected to further improve cash conditions.

The nine-month swap saw an increase in volumes and traded five times the volumes on the one-year swap rates. Traders increasingly preferred to trade in the nine-month swap, as rate cut bets have intensified to fall within the Feb-Oct period of monetary policy, dealers said. Others said the contract was being used for asset-liability management by some banks and corporate houses to manage their cost of funds amid tight liquidity.

"Traders are coming in, but there is not such a wholesale shift from the one-year (swap)," a dealer at a private bank said. "I think people are still sorting out their liquidity management in the sub-one-year OIS, which is why the contracts have been very active."

OUTLOOK

On Thursday, swap rates may open steady due to lack of significant cues on interest rates. Activity from foreign banks and foreign portfolio investors may increase after the lull at the year-end, as they return to trading desks in the new year. Offshore triggers may be limited, with most global markets--including the US--shut for New Year's Day.

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 Akul Nishant Akhoury

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