Informist, Tuesday, Sep 26, 2023

By Nishat Anjum

MUMBAI – Overnight index swap rates ended lower today as traders received fixed rates across the contracts, tracking an intraday fall in US Treasury yields, dealers said.

The one-year swap rate settled at 7.06%, against 7.09% at close on Monday. The five-year swap rate ended at 6.74% against 6.78% the previous day.

In the last two days, the trade volume in the 7- and 10-year swap rates also inched up. Typically, traders do not bet on swap contracts of more than five years. Dealers speculated that the flows may be from offshore traders, who weren't able to invest directly in the government bonds.

Moreover, domestic traders also received fixed rates tracking a fall in US Treasury yields, dealers said.

"There has been receiving throughout the day, largely from the domestic side, I think," a dealer at a foreign bank said. "Swap rates were the bigger story, not government bonds."

The yield on the 10-year US Treasury note fell to 4.50% from 4.56% in early trade, likely on short covering from 16-year highs, on fears of interest rates remaining higher for longer.

In early trade, traders paid fixed rates as US Treasury yields rose overnight from 4.49% to 4.56%. The US Treasury yields rose on expectations that the Federal Reserve may keep interest rates at higher levels for longer than initially anticipated.

Chicago Fed President Austan Goolsbee said on Monday that inflation staying above the Fed's 2% target remains a greater risk than tight central bank policy slowing the economy more than needed.

At its policy meeting last week, the US Federal Open Market Committee kept the interest rate unchanged, but projections by Fed officials indicated that interest rates in the world's largest economy would remain higher for longer. 

Moreover, Fed officials have projected one more rate hike by the end of this year. Currently, the federal funds target range is at 5.25-5.50%. 

"Swap rates have already started to factor in one more Fed rate hike. Even if they hike by 25 basis points in November, I do not see much rise in short-term swap rates," a dealer at a primary dealership said. Short-term rates are more sensitive to the interest rate outlook.

OUTLOOK

On Wednesday, swap rates are seen opening steady due to lack of cues on domestic interest rates.

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 6.90-7.15% and in the five-year segment at 6.60-6.85%.

End

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

Edited by Aditya Sakorkar

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