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Informist, Friday, Sept. 12, 2025

 

By Cassandra Carvalho

 

MUMBAI – Overnight indexed swap rates ended a tad higher Friday as traders paid fixed rate contracts to play on the spread between swap rates and government bond yields, dealers said. Traders also paid fixed rate contracts to hedge their bond forward rate agreements with insurance companies for the 7.24%, 2055 gilt at the weekly bond auction they said. The rise in swaps was capped due to the 10-year benchmark US Treasury yield trading in a 4.00-4.05% range, the lowest since early April. 

 

The one-year swap rate ended at 5.48%, against 5.46% Thursday. The five-year swap rate ended at 5.70%, against 5.68% Thursday. However, the one-year swap is down nearly 5 basis points so far this month, while the five-year swap rate is down nearly 9 bps. The total notional trade volume on Clearing Corp. of India's derivatives trading platform was INR 225.60 billion, down from INR 384.00 billion Thursday. The yield on the 10-year benchmark US Treasury note was 4.04% at 1700 IST, from 4.05% at the same time Thursday.

 

Traders played on the spread between gilt yields and swap rates by buying gilts at relatively higher yields and paying fixed contracts at lower rates in swaps. At the weekly bond auction, the government sold INR 150.00 billion of the benchmark five-year 6.01%, 2030 gilt and INR 130.00 billion of the 7.24%, 2055 gilt. The Reserve Bank of India set a cut-off yield of 6.29% on the five-year paper, offering a spread of 59 basis points over the five-year swap rate's closing level. The spread was lucrative for bond swaps, dealers said. 
 

Insurers lapped up supply of the 30-year paper at the auction due to lucrative yield levels, some of which was purchased through bond forward rate agreements, dealers said. Banks which entered these agreements paid fixed rate contracts in the five-year and 10-year swap rates. The 10-year swap rate was last traded on Sep. 3, the day before last week's auction. Those day's trades were also to hedge bond forward rate agreements, dealers had said.            

 

"Some bond FRA (forward rate agreement) might have been happening today (Friday)," a dealer at a private sector bank said. "Don't know about the amount but I'm just hearing that there's some bond FRA in 30-year paper, that's why some paying (in OIS). Some people may be putting in the bond swap trade against the five-year paper. The spread is wide. 5x5 (yield spread of five-year gilt over five-year swap) is 56 basis (points) which I think is a good spread." 

 

The three-month contract saw record trading volumes this entire week, since its maturity has included the next two domestic monetary policy decisions. It was the most-traded swap on Friday as well, with volumes of INR 51.00 billion. The Reserve Bank of India Monetary Policy Committee's next scheduled rate decisions are on Oct. 1 and Dec. 5.

 

India's CPI inflation for August did not change traders' views on rate cuts as the reading was in line with expectations. India's CPI inflation rose to 2.07% in August from an eight-year low of 1.61% in July, the statistics ministry said. An Informist poll estimated headline inflation at 2.1% in August, and traders were also expecting a similar reading. Core inflation for August remained on the higher side, at 4.1%, the same as July. Traders had priced in the fact that CPI inflation was likely to have bottomed out in July. 

 

On the contrary, traders were eagerly tracking US CPI inflation for August, which was released post-market hours Thursday. The 10-year US yield hit 4.00?ter headline inflation in August rose 2.9% on year in the US, in line with estimates. Core CPI inflation rose 3.1% on year, also in line with estimates. Jobless claims for the week ended Saturday in the US rose by 27,000 to 263,000, higher than a Wall Street Journal estimate of 235,000, and the highest level in almost four years. The CME FedWatch tool showed that Fed fund futures reflected a 7.5% probability of a 50-basis-point rate cut by the US Federal Open Market Committee next week, up from 6.1?fore the data. The fall in US yields capped a further rise in domestic swap rates. 

 

OUTLOOK

Swaps are not traded Saturdays. On Monday, swaps may take cues from the movement of US Treasury yields, ahead of the US Federal Open Market Committee rate decision on Wednesday. The US rate-setting panel is universally expected to cut its policy rate by 25 basis points, with the CME FedWatch tool showing a 7.5% chance of a 50 bps rate cut priced in Fed funds futures.

 

A further fall in swap rates is unlikely, given the expected rate cut in the US, but traders remain uncertain about further rate cuts in India. Some traders may also pay swap rates for bond swap trades. At the same time, offshore traders are likely to continue receiving fixed rates and put downward pressure on swap rates, dealers said. 

 

Traders may also take cues from geopolitical developments, especially on the US tariffs on Indian goods. Bloomberg reported that the US would urge the Group of Seven Nations to impose secondary sanctions on India and China for purchasing Russian oil.  

 

Swaps may also track the movement of crude oil prices and the rupee against the dollar. The one-year swap rate is seen in the range of 5.40-5.55% Monday. The five-year contract is seen at 5.60-5.78%.

 

	At 1700 IST	THURSDAY
1-year OIS	5.48%	5.46%
2-year OIS	5.45%	5.44%
5-year OIS	5.70%	5.68%
2-year MIFOR	5.98%	5.97%
5-year MIFOR	6.30%	6.29%

 

End

 

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

 

Edited by Deepshikha Bhardwaj

 

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