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Informist, Thursday, May 22, 2025

By Srijita Bose

MUMBAI – Overnight indexed swap rates ended higher on Thursday due to a rise in US Treasury yields, dealers said. Swaps rose near end of trade as offshore traders paid fixed rates after the US House of Representatives passed a wide-ranging tax bill that is expected to further swell the US government's budget deficit, they said. 

The one-year swap rate ended at 5.58%, higher than 5.56% Wednesday. The five-year swap ended at 5.67%, rising from 5.63% the previous day. The total notional trade volume on the Clearing Corp. of India's derivatives trading platform was INR 318 billion, higher than INR 162.38 billion Wednesday.

Offshore traders paid fixed rates in two- and five-year swaps throughout the day, but chose to pay rates aggressively near end of trade, dealers said. This was after the US House passed a tax and spending bill that would extend corporate tax cuts from US President Donald Trump's first term and increase military and border spending, dealers said. 

"There was some paying from offshore, and I think foreign banks also participated," a dealer at a primary dealership said. "I don't think the rest of the market caught on to the news immediately, but the five-year (rate) reacted very quickly."

The yield on the 10-year benchmark US Treasury note rose to 4.62% at 1700 IST, up 8 basis points from the Indian market close on Wednesday. US Treasury yields rose after lacklustre demand at a $16-billion 20-year US Treasury bond auction Wednesday showed waning appetite for US government debt.

Swaps rates were largely steady for most of the day despite the overnight rise in US yields. This was due to firm domestic rate cut bets and hopes of further easing of liquidity on the back of a record high surplus transfer by the Reserve Bank of India to the central government, which is expected to be announced Friday, dealers said. Traders are widely expecting around INR 3 trillion to INR 3.5 trillion of surplus to be given to the government, they said. More traders are now pricing in the terminal repo rate at 5.25% with two or more rate cuts by the end of 2025, dealers said. 

However, fears that US yields could rise further led domestic traders to pay fixed rates near end of trade, dealers said. "See, swaps have been in pressure because of US yields but today (Thursday) it was drawing some comfort from rise in (Indian) bonds," a dealer at another primary dealership said. "But right now, US (10-year) yield is at a crucial level. If it breaches 4.63-4.65% levels, then we could see a sell-off here also, so some caution because of that led to paying in swaps."

OUTLOOK

On Friday, rates are likely to track the movement of US Treasury yields after the release of weekly jobs data and a statement by New York Federal Reserve President John Williams, dealers said. Further rise in US yields could push the five-year swap rate up more than 10 bps, they said. 

Traders will also await the RBI's surplus transfer to the central government, which is likely to be announced after the central bank's board meeting, likely on Friday. Traders estimate a bumper surplus transfer, which will add durable liquidity to the banking system. If the transfer is in line with or above the median estimate of around INR 3 trillion, it could pull swap rates down, dealers said. The next significant cue on domestic interest rates would be the release of GDP data for Jan-Mar and 2024-25 (Apr-Mar) on May 30, they 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% Friday. The five-year contract is also seen in the 5.50-5.84% range.

End

Edited by Avishek Dutta

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