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Informist, Friday, May 23, 2025

By Srijita Bose

MUMBAI – Overnight indexed swap rates ended lower on Friday as US Treasury yields eased overnight, dealers said. Traders also received swaps as the arbitrage with Indian bond yields narrowed, they said.

The one-year swap rate ended at 5.53%, lower than 5.58% Thursday. The five-year swap ended at 5.63%, falling from 5.67% the previous day. The total notional trade volume on the Clearing Corp. of India's derivatives trading platform was INR 205.50 billion, lower than INR 318 billion Thursday.

The yield on the 10-year US Treasury yield was at 4.53%, down by 6 basis points from the Indian market close on Thursday. The yield eased slightly Friday on traders' "value buying" of US bonds after prices plunged Thursday due to US House of Representatives passing a spending bill, which included tax cuts. 

The ease in US yields provided some comfort to traders and offshore traders received fixed rates on the five-year swap, dealers said. "Everyone who has been paying before because of US yields fell today (Friday) was a good time to receive as well as unwind some of those bets," a dealer at a private sector bank said. 

The arbitrage on the five-year benchmark gilt yield over the five-year swap rate narrowed to nearly 22 bps from 43 bps a month ago. This led traders to receive fixed rates on the five-year swap, dealers said. Both onshore and offshore traders paid fixed rates on the five-year swap on attractive spreads, they said. Corporate houses also likely entered into reverse bond swaps on the five-year swap and the gilt, they said.

"The spread between the five-year swap and bond narrowed so much, so some reverse bond swap and even naked receiving was seen," a dealer at a primary dealership said. "Some of the comfort was also drawn from some ease in US yields...also domestic factors are positive and rate cut bets remain firm so that also led to receiving in short end as well."

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. Traders also received fixed rates on hope of a record high surplus transfer by the Reserve Bank of India to the central government, dealers said. Traders were widely expecting around INR 3 trillion, they said.

OUTLOOK

Swaps are not traded on Saturday. On Monday, rates are likely to track the movement of US Treasury yields over the weekend. If the 10-year US yield rises above 4.62%, it could push the five-year swap rate up above 5.74%, they said. 

Swaps could rise on Monday after the RBI's surplus transfer to the central government was at INR 2.69 trillion, which was lower than INR 3 trillion expected widely by traders, dealers said. While the surplus transfer is at a record high, dealers expect that the lower-than-estimated figure could lead to a fall in gilts, which in turn could lead swap rates to rise as well. 

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% Monday. The five-year contract is also seen in the 5.50-5.84% range.

End

Edited by Akul Nishant Akhoury

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