More Stories

Informist, Tuesday, Mar. 4, 2025

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended marginally lower Tuesday due to a sharp overnight fall in US Treasury yields, though traders paid fixed rates during the day as some contracts hit multi-year lows. The two-year swap rate closed below the 6.00% mark for the first time since May 2022, when the repo rate was 4.00%.

The one-year swap rate ended at 6.24%, its lowest since August 2022, against 6.26% on Monday. The five-year swap ended at 6.00%, its lowest in nearly three months, against 6.02% Monday.

The yield on the benchmark 10-year US Treasury note fell to 4.15% at 0900 IST, from 4.26% at 1700 IST Monday. US yields fell overnight after US manufacturing data was lower than expectations, adding to a string of recent economic data that points to slowing growth in the world's largest economy. Offshore traders received fixed rates aggressively early in the day, though the volume eased in the latter half of the trade as the 10-year US yield inched up to 4.18% near the close of Indian market hours, dealers said.

Additionally, investors fled to safe haven assets such as US government debt as fears of the repercussions of tariffs triggered a sell-off in the equity market, dealers said. Tariffs announced by US President Donald Trump on Mexico, Canada, and China came into effect Tuesday. During the day, China reportedly increased tariffs on some goods imported from the US. With tensions ratcheting up, the benchmark US Treasury yield slumped below the psychologically crucial 4.20% mark without much support, which was a surprise to some traders.

"The market reaction in OIS was immediate when everyone was looking at the opening level which was around 4.14% (on the US 10-year yield)," a dealer at a foreign bank said. "Anyway, offshore positioning has been to receive India rates, and slowly the mood is shifting even in the US on further rate cuts, should growth suddenly fall."

The fall in shorter tenure swaps was limited as the market is nearly pricing in two full rate cuts over the next 12 months, which is on the optimistic side, dealers said. Some traders are uncertain as to whether the Reserve Bank of India's Monetary Policy Committee will cut rates after all in April – already priced in – after bringing down the repo rate by 25 basis points to 6.25% in February. The government revised its advance estimate for 2024-25 (Apr-Mar) GDP growth higher by 10 bps to 6.5% on Friday, and the RBI projects 6.7% growth in FY26. 

The fall in the two-year swap rate came after Nomura Tuesday said that India's rates were on a cusp of a breakout lower. The brokerage increased its conviction on receiving the two-year non-deliverable OIS with March-International Monetary Market maturity to 4/5, which may have led to some offshore flows into the two-year swap rate as well, dealers said. Nomura factors in three more quarter-percentage point rate cuts, more aggressive than the 45 bps further cuts priced into the one- and two-year swap rates.

"The two-year has been pretty competitive and has followed the five-year (swap rate)," a dealer at a primary dealership said. "But I think further juice in all these is limited, unless market suddenly turns to the view of 75 bps of rate cuts in FY25, which seems unlikely if the growth projections (in India) are on track."

Notional volumes in the one-month swap rate halved from Monday, but remained much higher than usual at over INR 100 billion, due to its maturity in early April. Traders preferred paying fixed rates in this tenure due to the advantage of a few bank holidays within the contract's maturity, maximising their returns. Expectations of overnight rates soaring near the end of financial year 2024-25 (Apr-Mar) due to credit demand, after advance tax and goods and services tax outflows before it, added to the rush to hedge interest rate risk, dealers said.

OUTLOOK

On Wednesday, swap rates may take cues from the overnight movement in US Treasury yields with the imposition of the first wave of tariffs by Trump's administration, dealers said.

A possible global trade war following the tariffs could fuel a rise in inflation, which could cause central banks across the globe to refrain from cutting rates. The actions of the US Federal Reserve may also become crucial as Canada, Mexico, and China are the top trade partners of the US, immediately impacting prices in the world's largest economy.

Swap rates may also track the movement of government bond yields during the day. Short-term swaps will take cues from liquidity conditions and their impact on the overnight Mumbai Interbank Overnight Rate – the floating leg of the OIS contract. The overnight MIBOR was Tuesday set at 6.37%, the lowest in nearly a month.

Crude oil prices could also be a trigger for swaps if they move significantly, dealers said. A sharp movement of the rupee against the dollar could also give cues to swaps. The one-year swap rate is seen at 6.18-6.30% and the five-year rate is seen at 5.95-6.06%.

End

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

Edited by Ashish Shirke

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

Informist Media Tel +91 (11) 4220-1000

Send comments to feedback@informistmedia.com

© Informist Media Pvt. Ltd. 2025. All rights reserved.