Informist, Friday, Jul 21, 2023

By Kasthuri Akhil

NEW DELHI - Overnight indexed swap rates ended off highs today, as traders unwound their paid fixed-rate bets at a profit towards the end of the session, dealers said.

The one-year swap rate settled at 6.79%, unchanged from Thursday, while the five-year swap rate closed at 6.31%, compared with 6.30% the previous day.

During the day, traders paid fixed rates, tracking a rise in US Treasury yields, which led to the five-year contract rising to the day's high of 6.34%, dealers said. "OIS got paid and rose to 6.34% (five-year swap rate) due to US yields, but throughout the day it consolidated in the range of 6.33-6.34%," a dealer at a primary dealership said. "6.34-6.35% are very important levels, people were also receiving there to keep from stop losses."

The yield on the benchmark 10-year US Treasury note rose to 3.86% today from 3.79% at the end of Indian market hours on Thursday. US Treasury yields rose as weekly jobless claims data came in lower than expected on Thursday. The data pointed at continued resilience in the labour market, stoking fears among investors that the US Federal Reserve might keep interest rates higher for a prolonged period.

Data from the US Labor Department showed the number of people filing for initial claims for jobless benefit declined 9,000 to a seasonally adjusted 228,000 for the week ended Jul 15. The figure was below the 242,000 claims forecast by economists in a Reuters poll. Declining for the second week in a row, the claims came in at their lowest level since mid-May.

Some dealers speculated that traders paid fixed rates in the OIS market and stepped up purchase of the 7.25% 2063 paper at the auction, to protect their exposure to the bond under the bond-forward-rate agreement. "I would take today's movement to be more of receiving where people booked profits, as there was no significant impact seen of US yield in the OIS market as much as in G-sec" a dealer at a private bank said. "Paying mostly came from people for bond-FRA (forward-rate agreement) because there was auction today."

Dealers also speculated that corporates and mutual funds paid fixed rates today as the trajectory of US Treasury yields seems uncertain. The benchmark 10-year US bond's yield rising above the crucial 3.85% level, following the jobs data, with the outcome of the Federal open Market Committees' meeting so close, fears resurfaced that Fed officials may not tone down their forward guidance on interest rates, dealers said. 

According to the CME FedWatch tool, about 99.9% of Fed fund futures traders expect a 25-bps rate hike on Jul 26.

Moreover, traders were likely to have paid fixed rates as they increasingly expect the domestic inflation prints for the coming months to be above 6% due to monsoon-related disturbances, dealers said. India's CPI inflation rose to a three-month high of 4.81% in June, primarily due an uptick in prices of key food items, mainly vegetables.

OUTLOOK

Swaps are not traded on Saturdays.

On Monday, swap rates may open steady due to lack of fresh cues in the market on domestic interest rates, 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 6.65-6.90%, and the five-year at 6.20-6.40%.

End

Edited by Avishek Dutta

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