Informist, Monday, Feb 26, 2024
By Aaryan Khanna
NEW DELHI - Overnight indexed swap rates ended little changed, even as the five-year swap rate ended off lows as traders paid fixed rates, noting that the domestic and US interest rate view remained steady, dealers said.
The one-year swap rate settled at 6.74%, as against 6.73% on Friday. The five-year swap rate ended at 6.35%, against 6.36% on the previous trading day.
Offshore traders unwound some of their paid bets in the five-year OIS contract early in the day noting a sharp fall in US Treasury yields and crude oil prices. US yields fell as US Federal Reserve officials said they would look past an unexpected January inflation print and assess further data, and were still looking to cut rates later in the year. US CPI inflation in January printed at 0.3% on month and 3.1% on year, both higher than expected.
The 10-year US benchmark fell to 4.25% at the end of Indian market hours today, from 4.33% on Friday. However, it had hit a low of 4.22% intraday, and the small recovery led to some traders paying fixed rates in domestic swaps. Moreover, US Fed Governor Christopher Waller said that policymakers should delay interest rate cuts by at least another couple of months, which could slow economic growth and curb oil demand.
Consequently, the Brent crude oil futures contract for April delivery fell nearly 3% on Friday to settle at $81.62 a bbl, and was down further today to $81.31 a bbl at the end of Indian market hours.
According to the CME FedWatch Tool, rate cut expectations have been almost entirely wiped out at the next FOMC meeting in March, and only 21.4% of Fed fund futures traders expect a rate cut even at the meeting in May. It is only in mid-June that 64.4% of traders expect a cut of at least 25 basis points.
"Actually, nobody is quite sure why US yields have fallen," a dealer at a primary dealership said. "Regardless of the logic, there was at least some unwinding (of paid fixed rate bets) from foreigners based on US yields and crude."
The movement in the short-term swap rates was limited, as it has been over the past two weeks, as there have been no fresh cues on the trajectory of domestic interest rates even from the minutes released after market hours on Thursday. Volumes were also concentrated in the two- and five-year swap contracts owing to offshore flows, dealers said.
Traders are still betting on US interest rates being cut in June, and then the Reserve Bank of India's Monetary Policy Committee cutting the policy repo rate from 6.50% in October, dealers said. In an interview with Informist on Friday, external MPC member Jayanth Varma said he would still vote for rate cuts in April, after voting for a rate cut in the panel's Feb 6-8 policy review – the first such vote since May 2020.
"Varma is a high-flyer, he is always out of step with the rest of the committee," a dealer at a private bank said. "These are very strong comments, but I don't think they will amount to anything."
Moreover, the normalisation of liquidity conditions to bring overnight rates near the repo rate--as external MPC member Ashima Goyal said in her minutes and Shashanka Bhide said in an interview with Informist--still added uncertainty on the rate view, dealers said. The overnight Mumbai Interbank Offer Rate--the floating leg of the OIS contract--was set at 6.80% today.
OUTLOOK
On Tuesday, swap rates may open steady due to lack of triggers on the interest rate front. A sharp movement in US Treasury yields or crude oil prices may also lend cues at the opening.
The swap rate in the one-year segment is seen at 6.65-6.78% and in the five-year segment at 6.25-6.40%.
| At 1700 IST | FRIDAY |
1-year OIS | 6.74% | 6.73% |
2-year OIS | 6.42% | 6.42% |
5-year OIS | 6.35% | 6.36% |
2-year MIFOR | 6.72-6.84% | 6.76-6.88% |
5-year MIFOR | 6.74-6.86% | 6.78-6.90% |
End
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Akul Nishant Akhoury
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