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Informist, Thursday, Jan. 2, 2025

By Cassandra Carvalho

MUMBAI – Overnight indexed swap rates ended steady, falling off highs as US yields fell intraday, dealers said. They had risen earlier in the day as foreign banks likely paid fixed rates after returning from their year-end lull in trade.

The one-year swap rate ended at 6.52%, flat against Wednesday. The five-year swap rate settled at 6.23%, against 6.24% the previous day. 

Swap rates opened higher as foreign banks aggressively paid fixed rates, especially in the five-year swap rate, dealers said. Traders unwound their received positions in OIS ahead of the inauguration of Donald Trump as the next US president, fearing a further rise in US yields. The economic policies of Trump, who will take office on Jan. 20, are seen stoking inflation, thereby hindering rate-cut cycles across the globe.

"Foreign banks were paying with the intention of breaking the psychological 6.26% level (of the 5-year swap rate)," a dealer at a private bank said. "They made a fresh position before Trump, even though volumes are not that high."

However, since the five-year rate was not able to move past 6.26% at the day's high, swap rates reversed course in the second half as US yields fell. Offshore flows also pushed the five-year swap rates, while some domestic traders unwound their fixed-rate bets at a profit at 6.26%. The yield on the 10-year US Treasury note was at 4.54% at 1700 IST Thursday, down from 4.58% Wednesday.

"I've heard foreign banks are receiving, swaps are just tracking US yields now. Japanese market was shut, so now when Europe market opened US yields fell," a dealer at another private bank said.   

While swap rates maturing in two years or more were rising, shorter-tenure swaps were steady as liquidity conditions remained little changed, dealers said, which kept the overnight rate anchored. The overnight Mumbai Interbank Offer Rate--the floating leg of an overnight indexed swap contract—was at 6.56% Thursday, slightly down from 6.60% Wednesday. The liquidity deficit in the banking system narrowed to INR 1.05 trillion on Wednesday from INR 1.32 trillion Tuesday and government spending is expected to further improve liquidity conditions.

Notional volumes in contracts under 1-year were low, and no trades occurred in the 9-month contract. On Wednesday, the 9-month contract saw volumes five times the volumes on the one-year swap rates as bets on rate cuts intensified to fall within Feb-Oct period, dealers said. 

OUTLOOK

On Friday, swap rates may take cues from the movement of US yields after US weekly jobless claims and December manufacturing purchasing managers' index data due post market hours. Activity from foreign banks and foreign portfolio investors may increase after the year-end lull as they return to trading desks in the new year.

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 6.49-6.55% and in the five-year segment at 6.20-6.26%.

End

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

Edited by Saji George Titus

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