Informist, Tuesday, Jan 11, 2022

By Aaryan Khanna 

NEW DELHI – Overnight indexed swaps ended on a mixed note, with traders unwinding their paid fixed rate positions in long-term swap rates, as US Treasury yields and crude oil trimmed the gains they had made in recent days, dealers said.

The one-year swap rate ended at 4.38% against the previous close of 4.39%, while the five-year swap rate ended at 5.57% against Friday's close of 5.61%.

Fear of a quicker-than-expected rate hike by the US Federal Reserve sent Treasury yields surging over the past week. Goldman Sachs expects the Fed to raise interest rates four times this year, matching the view of analysts at JP Morgan and Deutsche Bank.

The yield on the 10-year Treasury note rose 2 basis points to 1.78% on Monday, but ended back at 1.76% at the end of Indian market hours. Domestic traders had taken bets on the 10-year yield rising further, past the key 1.80% mark, leading to some unwinding in the five-year swap rate, dealers said.

Meanwhile, crude oil prices fell overnight as concerns about fuel demand amid a rapid rise in new COVID-19 cases globally, particularly of the Omicron variant, more than offset worries about disruption in oil supply from West Asian producers.

Last week, oil prices had surged as much as 5% due to political turmoil and unrest in Libya and Kazakhstan, which led to fears of a hit to supply.

Brent crude oil futures for March ended 1.1% lower at $80.87 per bbl on Monday. Typically, a fall in crude oil prices reduces risks of imported inflation in India and provides more room to the Reserve Bank of India to prolong its monetary policy accommodation.

"Paying has come off, US Treasury yields have stabilised and are not threatening 1.80% (on the 10-year note), there was some unwinding in the five-year and longer swaps from the foreign side as well," a dealer at a private bank said.

"Moreover, people that were hedging would not come to pay on a day like today when the (gilts) market recovered."

Traders had paid fixed rates on Monday to protect their underlying investments in gilts, but covered their short bets today in dated securities, which could have led to the five-year OIS rate easing, dealers said.

On the other hand, the one-year swap rate ended steady amid high volumes as traders were keen to place bets on the pace of domestic policy normalisation, which was seen diverging from the pace at which the US Fed would tighten policy. 

Dealers cited lack of significant domestic cues influencing short-term rates, as the market has already factored in the RBI's steps for managing liquidity in January, for the thin band in which the one-year swap rate has remained since the beginning of the month.

"As you can see, the one-year rate is where the action lies because there's a lot of interest in how 2022 will unwind in terms of domestic policy, but I think it's fairly priced at these levels," a dealer at a primary dealership said.

OUTLOOK

Swap rates are likely to open steady on Wednesday because traders may stay on the sidelines due to lack of significant cues.

Traders may avoid large bets ahead of India's CPI inflation print for December, as well as the US December CPI print, which will be released after market hours on Wednesday.

Any sharp movement in US Treasury yields and crude oil prices might lend cues at open.

The swap rate in the one-year segment is seen at 4.30-4.55% and the five-year at 5.55-5.80%.

End

Edited by Avishek Dutta

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