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Informist, Wednesday, Jan. 8, 2025

By Aaryan Khanna

NEW DELHI – Overnight indexed swaps ended higher Wednesday after a late surge, led by offshore traders paying fixed rates as US Treasury yields rose, dealers said. Swap rates traded in a thin band for most of the day as the optimism on domestic rate cuts starting in February had been priced in earlier this week, they said.

The one-year swap rate ended at 6.50%, against 6.47% on Tuesday. The five-year swap rate settled at 6.16%, against 6.20% the previous day.

The yield on the 10-year US Treasury note rose to 4.71% at 1700 IST, from 4.64% at the end of Indian market hours Tuesday. The benchmark US yield touched its highest level since April. Domestic traders fear that the benchmark US yields could rise to as much as 5%, a high hit in October 2023, as incoming President Donald Trump's policies promised in his campaign are seen to be inflationary.

"NDOIS (non-deliverable OIS, an instrument traded offshore) just shot up in the afternoon. The spreads were too large for anyone not to pay onshore," a dealer at a foreign bank said.

The overnight rise in US yields, following robust data on job openings and the purchasing managers' indices, did not lead to significant paying in swap rates in the first half as it was counterbalanced by optimism that the Reserve Bank of India's Monetary Policy Committee would cut the repo rate by 25 basis points next month. Dealers said December inflation data, due on Monday, will likely show cooling food price pressures, and the rate-setting panel may cut rates to arrest a slowdown in growth. The government's first advance estimate of GDP growth in 2024-25 (Apr-Mar) was 6.4%, against 6.6% projected by the central bank and 8.2% a year ago.

Meanwhile, dealers said an offshore hedge fund which had been receiving the two- and five-year swap rate since Monday did not continue its activity on Wednesday. However, several traders were still feeling the effects of the flows, as the received fixed rate positions from the hedge fund had led to stop-losses. Traders were reluctant to pay fixed rates in the two-year contract fearing the hedge fund would reappear later this week, betting on a larger quantum of rate cuts than the 50-75 bps priced into the swap rate, dealers said.

Activity and rates in the one-month swap rate both rose due to prevailing banking system liquidity tightness, with counterparties citing optimism on a February rate cut while receiving the swap, dealers said. On Tuesday, the net liquidity injected by the RBI--a proxy for systemic liquidity deficit--rose to INR 1.44 trillion from INR 978.26 billion Monday.

"The short-term swaps always react when you have days like today (Wednesday)," a dealer at a private bank said. "You can't escape paying pressure when the overnight (Mumbai Interbank Offer Rate) goes to 6.90%." The overnight MIBOR – the floating leg of the OIS contract – was set at 6.88% on Wednesday and 6.90% on Tuesday.

OUTLOOK

On Thursday, swap rates may take cues from the overnight movement of US Treasury yields after the release of the minutes of the US Federal Open Market Committee's December meeting, dealers said. US private jobs data and weekly jobless claims data will also lend cues. Weekly jobless claims were lower than consensus estimates for the week ended Saturday, another data print pointing to resilience in the US economy.

Any offshore or domestic corporate flows would also lend cues to swap rates. Traders will also start positioning ahead of India's CPI inflation data for December due on Monday. The swap rate in the one-year segment is seen at 6.42-6.55% and in the five-year segment at 6.10-6.26%.

End

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

Edited by Tanima Banerjee

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