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Informist, Friday, Jan. 3, 2025

By Cassandra Carvalho

MUMBAI – Overnight indexed swap rates ended lower as foreign banks received swap rates after US Treasury yields reversed an overnight rise, dealers said. Easing liquidity in the banking system and domestic rate cut hopes in February also anchored short-term swap rates. Earlier in the day, banks had paid fixed rates in the two- and five-year swaps to hedge bond forward-rate agreements. 

The one-year swap rate ended at 6.51%, against 6.52% on Thursday. The five-year swap rate settled at 6.22%, against 6.23% the previous day. 

Swap rates opened higher tracking an overnight rise in US yields, but fell in the second half on positive cues, dealers said. The yield on the 10-year US Treasury note rose to 4.57% at 0900 IST from 4.54% at Thursday's Indian market close, after weekly jobless claims came in lower than expected. The US initial unemployment claims were 211,000 for the week ended Saturday, against a Dow Jones poll of 225,000.  

US manufacturing Purchasing Managers' Index readings were also higher than expected. Both data prints pointed to economic resilience in the US, causing the 10-year US yield to hit 4.60% overnight. This also led to offshore traders paying fixed rates early, before unwinding them later in the day once the 10-year US yield cooled to 4.54%, dealers said.

Swap traders also paid fixed rates earlier in the day to hedge their bond-forward rate agreements ahead of the weekly gilt auction worth INR 320 billion, which included the sale of INR 100 billion of the 7.09%, 2074 bond. Around INR 15 billion worth of bond forward-rate agreements were likely struck for the auction stock between life insurers and foreign banks, who made their return to the market after the year-end lull, dealers said.  

"There was some FRA-related (forward-rate agreement) paying in the morning, but now there are only positive cues in the market so we're on the receiving side," a dealer at a private bank said. 

As for short-term swaps, rates were anchored by hopes the Reserve Bank of India's Monetary Policy Committee would cut rates in February under new RBI Governor Sanjay Malhotra. Some traders preferred receiving the one-year swap, saying it was not pricing in a February rate cut, while others received fixed rates on the six-month contract.

Easing liquidity conditions also reduced the paying pressure in swap contracts maturing up to one year. The RBI injected INR 674.45 billion into the banking system on Thursday, the lowest required since Dec. 15.

Some traders also built positions ahead of India's CPI data for December due on Jan. 13, betting on a benign reading, and US jobs data due next week. After the gilt auction went on expected lines, paying pressures in OIS from traders looking to protect their underlying gilt holdings also decreased, dealers said.

"There's strong receiving interest at the 6.24-6.25% levels (in the five-year swap) because of the auction and US yields. There'll be some relief (major cues) in the next few days, and we'll be data-dependent; there's NFP (non-farm payroll data), and (US president-elect Donald) Trump also."

OUTLOOK

Swap rates are not traded on Saturday. On Monday, swap rates may take cues from the movement of US yields. Geopolitical cues, along with US data points, may lend to cues. 

Trading activity is likely to pick up next week as traders return from leave after the holiday season. Major domestic and global cues, such as US jobs data, the release of minutes of the Federal Open Market Committee's December meeting and the first advance estimate of India's GDP for 2024-25 (Apr-Mar) are due next week. Crude oil prices, which have been steadily rising this week, will also be tracked, dealers said. 

The swap rate in the one-year segment is seen at 6.42-6.60% and in the five-year segment at 6.10-6.30%.

End

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

Edited by Saji George Titus

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