India IRS Review
5-yr up as US ylds rise; short-end steady on rate cut bets
This story was originally published at 19:31 IST on 7 April 2025
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By Srijita Bose
MUMBAI – The five-year overnight indexed swap rate ended higher Monday tracking an intraday rise in US Treasury yields, dealers said. Traders also paid fixed rates on the swaps to hedge their bets ahead of the Reserve Bank of India's Monetary Policy Committee meeting outcome, they said.
The one-year swap rate ended at 5.90%, just marginally down from 5.91% Friday. The one-year swap rate ended off lows as traders have already priced in a 25-basis point rate cut along with a change in stance to 'acommodative' from 'neutral' by the RBI's rate setting panel on Wednesday. Traders chose to pay fixed rates to hedge against their government bond exposure, dealers said. Corporate houses and domestic traders likely paid fixed rates, they said. Meanwhile, the five-year swap ended at 5.77%, up from 5.73% Friday.
"US yields (on the 10-year US Treasury note) have again gone back up to 4.0% and some paying (in swaps) is coming because of that," a dealer at a private bank said. "Hearing corporate flows too today (Monday) along with profit booking."
The 10-year US yield rose to 4.00% from 3.87% at 1700 IST Friday. The yield on the 10-year US note had dropped below the psychological 4% mark last week as investors bought US bonds to invest in safe-haven assets amid fears of a global economic slowdown after US President Donald Trump announced a slew of reciprocal tariffs on around 60 countries Thursday. However, US Federal Reserve Chair Jerome Powell's warning of higher inflation and lower growth in the US have made investors wary of the future trajectory of interest rates in the US, dealers said. US yields also rose after the Indian markets closed Friday as US government data showed March non-farm payrolls rose higher than expected.
Traders also paid fixed rates to book profits against their earlier received positions as swap rates had fallen to near three-year lows last week, dealers said. Swap rates are pricing in nearly 75 bps of rate cuts by the RBI by the end of 2025 and dealers said the current rates looked lucrative to pay.
Notional trade volumes on the three-month swap rose to INR 51 billion and rates on the contract fell as traders likely received fixed rates on the contract. Traders also likely chose to receive shorter tenure OIS while paying in longer tenures to reduce their exposure ahead of the RBI's policy decision, dealers said.
"Market sentiment is of receiving in the short-term (swaps) in (the) wake of global market situation...also it reduces the overall exposure since per basis value in short-end is lower," a dealer at another private bank said.
Meanwhile, the overnight Mumbai Interbank Offered Rate--the floating leg in an OIS contract--rose 9 bps to 6.24%. However, dealers said the rise in the overnight rate could be short-lived as liquidity is expected to remain surplus heading into Wednesday, when the Monetary Policy Committee meeting's decision will be known.
OUTLOOK
On Tuesday, swap rates may take cues from the movement in US Treasury yields, dealers said. The movement in Indian government bond yields may also lend cues to swap rates. Traders may also take cues from any statement on the US rate trajectory by Federal Reserve Governor Adriana Kugler later Monday.
Short-term swaps will closely track the movement in the overnight MIBOR, with the RBI's liquidity measures seen keeping the rate near the repo rate of 6.25%, dealers said. Any further improvement in liquidity will also be closely tracked by traders. Crude oil prices could also be a trigger for swaps if they fall significantly, dealers said. Any sharp movement in the rupee's dollar exchange rate may also provide cues. The one-year swap rate is seen at 5.90-5.95% and the five-year rate at 5.73-5.80%.
At 1700 IST | THURSDAY | |
1-year OIS | 5.90% | 5.91% |
2-year OIS | 5.70% | 5.69% |
5-year OIS | 5.77% | 5.73% |
2-year MIFOR | 6.04-6.16% | 6.03-6.15% |
5-year MIFOR | 6.25-6.37% | 6.22-6.34% |
End
Edited by Akul Nishant Akhoury
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