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Informist, Tuesday, Mar. 25, 2025

By Srijita Bose

MUMBAI – Overnight indexed swap rates rose as traders sought to hedge their exposure after picking up government bonds, dealers said. An overnight rise in US Treasury yields also led to a rise in swap rates.

The one-year swap rate ended at 6.12%, against 6.10% on Monday. Meanwhile, the five-year swap ended at 5.95%, against 5.90% Monday. Rates in two- and five-year swaps have risen from three-year lows hit last week as traders said the fall in rates was overdone and reflected too much optimism on rate cuts, dealers said.

Even with the unwinding of received fixed rate bets, swap rates continued to fully price in a 25-basis-point repo rate cut in April. Offshore traders were particularly prominent in swap rates up to one year, dealers said. The three-month swap rate, which rose 2 basis points to 6.28% likely saw hedging activity from an institutional investor, likely domestic, with regular and large trades through the day.

"Sometimes, there are less reasons and more impulse-based moves. The swaps had moved last week below estimate, now it has moved up also because of profit-booking and book management," a dealer at a private bank said. "There will be receive trades in last two days (of the month)."

Foreign investors likely paid fixed rates on longer-tenure swaps after picking up state bonds at the largest auction on record, dealers said. Traders also preferred to pay rates on swaps instead of placing short bets on gilts as they have already priced in a rate cut by the Reserve Bank of India's Monetary Policy Committee in April, while bond yields are seen falling by another 2-3 bps before the policy review meeting, they said. 

Meanwhile, the yield on the 10-year US Treasury note rose to 4.37% from 4.30% at 1700 IST on Monday. US President Donald Trump on Monday said he might give a "lot of countries" breaks on tariffs. While Trump still plans to impose new reciprocal tariffs next week, traders remained cautious about the size of the duties and the countries to be targeted. As the tariff threat faded, risk appetite improved and demand for safe-haven US Treasuries fell. 

"The aggressive paying interest today (Tuesday) was because of US yields," a dealer at another private bank said. "Though people are expecting tariffs to be diluted but how it plays out needs to be seen."

OUTLOOK

On Wednesday, swap rates may take cues from the movement in US Treasury yields. Swaps may also react to the movement in government bonds during the day, dealers said.

Any news on the US government's proposed tariffs and their potential impact on global trade may also impact swap rates. Short-term swaps will closely track the movement in the overnight Mumbai Interbank Offered Rate, with the RBI's proactive liquidity measures seen keeping the rate below the Marginal Standing Facility rate of 6.50% for the rest of the seasonal tightness in March, dealers said.

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 provide cues to swaps. The one-year swap rate is seen at 6.00-6.13% and the five-year rate at 5.85-6.00%.

End

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

Edited by Avishek Dutta

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