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Informist, Monday, May 19, 2025

By Srijita Bose

MUMBAI – The five-year overnight indexed swap rate ended higher Monday owing to a rise in US Treasury yields since Friday, dealers said. Meanwhile, the one-year swap rate was largely steady on Monday as at least two domestic rate cuts of 25 basis points each have already been priced in and traders await further cues on the same, they said.

The one-year swap rate ended at 5.63%, marginally up from 5.62% Friday. The five-year swap ended at 5.71%, higher than 5.66% seen in the previous session. The total notional trade volume on the Clearing Corp. of India's derivatives trading platform was INR 382.10 billion, lower than INR 477.55 billion Friday.

The yield on the 10-year benchmark US Treasury note rose to 4.56% at 1700 IST Monday from 4.42% at close of Indian market hours on Friday. US yields rose after Moody's Ratings Friday downgraded the US long-term issuer and senior unsecured ratings to 'Aa1' from 'Aaa'. The downgrade was due to an increase in government debt and interest payment ratios over the last decade, which have now ballooned to levels significantly higher than similarly rated countries, the ratings agency said. This raised concerns about the fiscal position of the world's largest economy. The agency joined Fitch Ratings and S&P Global in rating the US economy one notch below the top rating. Moreover, data released Friday showed that the University of Michigan's consumer sentiment index fell to 50.8 in May from 52.2 in April, driven partly by a surge in inflation expectations.

Traders feared that the US 10-year yield could rise above the key 4.80% level, dealers said. Offshore traders chose to pay fixed rates on both two-year and five-year swaps, they said. The rate on the two-year swap rose to 5.53% Monday from 5.49% on Friday. Some traders also entered bond-swap transactions, seeking to capture the spread between gilt yields and swap rates, dealers said.

"Swaps have breached all technical levels because US T (US yields) is breaching levels, so offshore paying bias is there and there are also good amount of steepeners in the curve here, " a dealer at a private sector bank said. "There is a technical level around 5.72-5.73% (on the 5-year OIS). Let's see, if that breaches, then rates could even go up to 5.84% levels."

Traders awaited the Reserve Bank of India's surplus transfer to the government for further domestic triggers, dealers said. Most traders expect a bumper surplus transfer by the RBI to the central government, expected to be announced on Friday, which will eventually translate to greater liquidity in the banking system, dealers said. Traders widely expect a record INR-3-trillion surplus transfer to the government. 

Caution before domestic triggers lined up during the week kept swap rates maturing in up to one-year largely steady. However, the one-month swap ended 3 bps lower at 5.82%. The notional traded volume on the contract was at INR 32.65 billion, sharply lower than INR 143.00 billion on Friday. While other shorter-tenure swaps remained mostly unchanged from Friday, the fall in rates in the one-month swap was likely due to a fall in the triparty repo rate as traders wanted to capture the arbitrage between the two rates, dealers said.

"Short-term is relatively well-behaved right now, the sentiments and expectations are positive, and with all other rates also coming down, some receiving bias also could be there," a dealer at another private sector bank said. "There is more risk on US T (US yields) now."

OUTLOOK

Tuesday, rates are likely to track the movement in US Treasury yields after the release of US economic data and comments from US Federal Reserve officials, dealers said. The next significant cue on domestic interest rates would be the release of GDP growth data for Jan-Mar and FY25 on May 30, they said.

Traders also await the RBI's surplus transfer to the central government, which is likely to be announced after a meeting of the central bank's board, likely on Friday. Traders estimate the dividend to be around INR 3 trillion, which will add durable liquidity to the banking system. If the transfer is in line with or above the estimate, it could pull swap rates down, dealers said.

Traders will also track the movement of the overnight Mumbai Interbank Offered Rate for direction on short-term swap rates. The one-year swap rate is seen in a range of 5.50-5.75% Tuesday. The five-year contract is also seen in the 5.50-5.84% range.

End

Edited by Deepshikha Bhardwaj

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