Informist, Monday, Dec 11, 2023

By Aaryan Khanna

MUMBAI – Overnight indexed swap rates ended higher as traders paid fixed rates, tracking a rise in US Treasury yields as US jobs data, released after market hours Friday, pointed to an extended pause on rates in the world's largest economy rather than imminent rate cuts, dealers said. 

The one-year swap rate settled at 6.88%, against 6.86% on Friday. The five-year swap rate ended at 6.51%, compared with 6.47% the previous day.

The yield on the benchmark 10-year US Treasury note rose to 4.24% at the end of Indian market hours, as against 4.18% on Friday. US Treasury yields surged after November non-farm payroll data showed continued tightness in the labour market despite the US Federal Reserve’s efforts to cool the economy.

On Friday, the yield on the 10-year paper jumped 10 basis points, marking its biggest one-day gain since Nov 9. The two-year US Treasury yield, rose by 14.5 basis points, its biggest daily jump since Jun 29. It closed at 4.71% on Friday, as against 4.58% on Thursday.

The Labor Department's employment report indicated that US job growth accelerated in November. Data showed non-farm payrolls increased by 199,000 jobs last month, above the 180,000 estimate of economists polled by Reuters, after rising by an unrevised 150,000 in October. The unemployment rate fell to 3.7% from the near-two-year high of 3.9% in October.

After the strong economic data, according to CME's FedWatch Tool, expectations for a March cut by the US Fed of at least 25 basis points fell to 39.9% from 57.4% a week ago.

"It was a very straightforward movement, we just had to pay some respect," a dealer at a private bank said. "There was no risk of a further rise towards 6.55% (in the five-year swap rate) as foreign players have quieted down in December, so even with a significant US yield movement, the volumes are quite shallow."

The Monetary Policy Committee on Friday also failed to lend fresh interest rate cues to the market, as the panel kept the repo rate unchanged at 6.50% and retained the stance of "withdrawal of accommodation" to ensure inflation progressively aligns with the central bank's target, while supporting growth.

Short-term swap rates saw an increase in volumes but were little changed by the end of trade on caution ahead of key inflation data in the US and India on Tuesday, dealers said.

According to a poll by Informist, India's retail inflation based on CPI likely rose to a three-month high of 5.8% in November from 4.87% in October due to a rise in vegetable prices. The Reserve Bank of India's comments at the domestic policy review on Friday suggested it would not take further monetary policy actions even if the print crossed 6%, dealers said.

Meanwhile, the US headline CPI data for November is expected to show annual inflation of 3%, according to a Dow Jones poll. Core CPI inflation is seen at 4% on an annualised basis, against a 3.2% on-year print in October.

Moreover, liquidity remained in deficit, which drove up the Mumbai Interbank Offer Rate – which forms the floating part of the OIS contract, dealers said. On Sunday, liquidity in the banking system was in a deficit of 231.59 bln rupees, against 127.97 bln rupees at the end of trade on Friday, according to the Reserve Bank of India data. Consequently, the overnight MIBOR was fixed at 6.85%, above the RBI's Marginal Standing Facility of 6.75%.

"The only softening we see is on liquidity, and even that may take a long, long time," a dealer at a foreign bank said. "While I'm comfortable that rates won't go up from here, playing for a rate cut seems a prudent call right now."

OUTLOOK

On Tuesday, swap rates are seen opening steady as traders may avoid aggressive bets due to a lack of fresh interest cues, dealers said.

US and India CPI inflation prints for November, both scheduled after market hours on Tuesday, are keenly eyed. The impact of the US print will likely be higher on OIS rates, dealers said.

A sharp move in US Treasury yields and crude oil prices may also lend cues at the opening.

The swap rate in the one-year segment is seen at 6.78-7.00%, and in the five-year segment at 6.40-6.60%.

End

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

Edited by Deepshikha Bhardwaj

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