Informist, Thursday, Jul 13, 2023

By Kasthuri Akhil

NEW DELHI - Overnight indexed swap rates ended sharply lower as traders received fixed rates, tracking a slump in US Treasury yields, dealers said. US Treasury yields plunged after the release of lower-than-expected CPI data for June, which raised hopes of less aggressive monetary policy tightening by the US Federal Reserve. 

The one-year swap rate settled at 6.76%, against 6.82% on Wednesday. The five-year swap rate closed at 6.27%, against 6.40% on the previous trading day.

"There has been unwinding of paid positions, and fresh receiving bets as well," a dealer at a primary dealership said. "I was hearing that foreign banks were receiving on the hopes that US yields will fall further and consequently our yields too. Even the two-year US yield has fallen sharply."

The yield on the benchmark 10-year US Treasury note fell to 3.83% from 3.95% at the close of the Indian market on Wednesday, after data showed that the US CPI for June came in at 3%, lower than the 3.1% expected by economists in a Dow Jones poll. It marked the smallest annual increase since March 2021. The CPI print was at 4.0% in May. 

Traders now say that the likelihood of two rate hikes by the Fed in 2023 can now be ruled out. The June inflation print gave hope that the US rate-setting panel may adopt a wait-and-watch approach after a hike in the upcoming policy review on Jul 26, dealers said.

According to the CME's FedWatch tool, close to 92% of Fed fund futures traders expect the US rate-setting panel to hike the federal funds rate by 25 basis points at its meeting this month, while the rest expect it to keep rates unchanged at 5.00-5.25%.

Meanwhile, market consensus on the domestic rate trajectory remained unchanged, even after the release of a higher-than-expected retail inflation print in June. India's CPI inflation rose to a three-month high of 4.81% in June, against expectations of 4.6% in an Informist poll. The rise in the headline print was primarily due to an uptick in the prices of key food items, mainly vegetables.

The market widely expects the Reserve Bank of India's Monetary Policy Committee to hold the repo rate at 6.50% at least till the end of the current financial year ending March, dealers said.

Dealers said both offshore and domestic traders received fixed rates in the OIS market today tracking US yields. Moreover, some traders unwound paid fixed rate bets in the five-year contract after stop-losses were hit at 6.33-6.34% levels. "It was a complete free fall today because it was a big event that led US yields to fall so sharply," a dealer at a private bank said. "Stop-losses were mainly triggered because of the event (lower-than-expected US CPI print) and was not limited to any specific levels."

OUTLOOK

On Friday, 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 6.30-6.55%.

End

Edited by Avishek Dutta

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