Informist, Friday, Nov 3, 2023
By Aaryan Khanna
NEW DELHI – Overnight indexed swap rates continued their fall this week as US Treasury yields fell further on Thursday, leading offshore traders to receive fixed rates aggressively, dealers said.
The one-year swap rate settled at 6.89%, compared with 6.91% on Thursday, down 8 basis points this week. The five-year swap rate ended at 6.59%, against 6.62% the previous day, down 13 bps this week.
Yield on the benchmark 10-year US Treasury note fell to a three-week low on Thursday, as market participants were of the view that the Federal Reserve was done hiking rates and as data showed unemployment claims in the US rose more than expected. Expectations of a weak payrolls report for October later today also contributed to the drop in yields.
Data released on Thursday showed new claims for unemployment benefits in the US increased moderately last week. Initial claims for state unemployment benefits rose 5,000 to a seasonally adjusted 217,000 in the week ended Oct 28. A poll by Reuters had forecast 210,000 claims.
The yield on the benchmark 10-year US Treasury note fell to 4.64% at the time of Indian market close today, from 4.71% on Thursday.
The full impact of the fall in US yields was not considered by traders on caution ahead of the non-farm payrolls data for October, which is seen as a key indicator to cement the recent change in view that the US will not see another rate hike this year, and the softer rate outlook in general, dealers said.
"There is a lot of positivity from offshore players that US yields could fall more, we're just waiting for the payrolls data," a dealer at a foreign bank said.
Short-term swap rates also eased somewhat, though the fall was limited by high overnight rates, dealers said. The Mumbai Interbank Offer Rate--the floating leg of the swap contract--was fixed at 6.84% today, well above the policy repo rate of 6.50%.
With US rates seen at a pause, chances of further policy tightening in India also diminished substantially and traders unwound their paid fixed rate bets that they had taken to protect against a rise in rates. Instead of keeping liquidity conditions tight till April, the Reserve Bank of India might now choose to start pivoting away from such conditions as early as January, which is seen as the time when the Fed formally announces an end to its policy tightening, dealers said.
The RBI may fully unwind its pseudo-rate hike using the tight liquidity conditions by April, and overnight rates may tend towards 6.50% again rather than 6.75%, dealers said. But rate cuts were likely still around a year away as India CPI's inflation is not seen falling to the RBI's target of 4% at least until Jul-Sep 2024.
"I think we are closer to the baseline of where US yields could fall to, and the five-year swap has sort of priced that in," a dealer at a primary dealership said. "The one-year has also corrected quite a bit, I don't think we will fall below 6.85% there, that would be pricing in too much positivity."
OUTLOOK
OIS rates are not traded on Saturday.
On Monday, OIS rates may open lower after US non-farm payrolls data for October showed a slowdown in the US economy and consequently no further policy tightening by the US central bank.
The US economy added 150,000 jobs in October, compared with a 170,000 estimate in a poll by Dow Jones. Previous months' job additions were also revised lower. The unemployment rate inched up to 3.9% from 3.8%.
A sharp move in US Treasury yields and crude oil prices may also lend cues at the opening.
The swap rate in the one-year segment is seen at 6.85-7.00% and in the five-year segment at 6.50-6.75%.
| At 1700 IST | THURSDAY |
1-year OIS | 6.89% | 6.91% |
2-year OIS | 6.61% | 6.63% |
5-year OIS | 6.59% | 6.62% |
2-year MIFOR | 6.94-7.06% | 6.97-7.09% |
5-year MIFOR | 7.03-7.15% | 7.05-7.17% |
End
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Aditya Sakorkar
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