Informist, Monday, May 22, 2023
By Anjali
NEW DELHI – Overnight indexed swap rates ended lower today as traders received fixed rates across tenures on expectation that liquidity in banking system will rise after the Reserve Bank of India on Friday announced the withdrawal of 2,000-rupee banknotes, dealers said. Short term swap rates fell more as liquidity conditions impact short-term money market instruments.
The one-year swap rate settled at 6.52% against 6.56% on Friday, while the five-year swap rate ended at 5.95% against 5.97% on the previous trading day.
"The swaps opened lower because there was this euphoria that swaps will fall and yields (gilts) will collapse," a dealer at a private bank said. "But against the expectations, the impact is not as big and the rates recovered afterwards."
On Friday, the RBI said it would withdraw the highest denomination banknotes of 2,000 rupees from circulation by Sep 30. By the end of September, the market expects banking system liquidity to increase gradually by 500 bln to 1.5 trln rupees. Traders see easing liquidity conditions by way of increased deposits to sustain only for a short period of time.
The swaps recovered slightly by the end of the trade tracking a rise in US Treasury yields, dealers said. The yield on the benchmark 10-year US Treasury note rose by 5 basis points to 3.70% on Friday.
"At the end, US yields bounced back, so there was some paying in 5-year OIS," a dealer at a primary dealership said. "Now, we'll see where US yields go."
US Treasury yields closed higher on Friday due to risk-off sentiment following news of a deadlock between lawmakers on negotiations over the US government's debt ceiling.
The talks between top US bureaucrats about raising the federal government's $31.4-trln debt ceiling were paused on Friday. This was followed by a phone call between Biden and Congressional leaders over the weekend, in which they decided to resume their talks in Washington today.
If the US fails to raise its borrowing limit before the first week of June, the world's largest economy is likely to run out of money and default on its payment obligation. This will result in a cascading effect across financial markets worldwide.
OUTLOOK
On Tuesday, swap rates are seen opening steady due to lack of significant domestic cues, dealers said. Traders will watch out for any sharp movement in US Treasury yields and crude oil prices at open.
The swap rate in the one-year segment is seen at 6.50-6.60%, and the five-year at 5.90-6.05%.
| At 1700 IST | Friday |
1-year OIS | 6.52% | 6.56% |
2-year OIS | 6.15% | 6.18% |
5-year OIS | 5.95% | 5.97% |
2-year MIFOR | 6.52-6.64% | 6.53-6.65% |
5-year MIFOR | 6.53-6.65% | 6.54-6.66% |
End
Edited by Akul Nishant Akhoury
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