Informist, Tuesday, May 23, 2023
By Nishat Anjum
MUMBAI – Overnight indexed swap rates ended sharply higher today as offshore traders paid fixed rates across tenures on caution due to the rising uncertainty around US debt ceiling, dealers said. Moreover, domestic traders unwound their received-fixed-rate bets, leading to a rise in swap rates.
The one-year swap rate settled at 6.56% against 6.52% on Monday, while the five-year swap rate ended at 6.06% against 5.95% on the previous trading day.
“There was continuos offshore paying in the swaps rate today as people were worried about the US debt ceiling issue. If you look at US yields, they have been inching up too,” a dealer at a primary dealership said. “After the paying started, traders who had earlier received at 6.00% (in the five-year segment), started to cut their positions.”
If the US fails to raise its borrowing limit before the first week of June, the world’s largest economy is likely to run out of money and default on its payment obligation. This may result in devastating effects across all financial markets worldwide.
The yield on the benchmark 10-year US Treasury note rose to 3.75% by the end of Indian market hours as compared to 3.72% on Monday. US Treasury yields rose as investors focus on negotiation about raising US Government’s borrowing limit.
However, the market remained unsure about the US Federal Reserve’s monetary policy path going forward as US Fed officials gave mixed signals.
US Fed St. Louis President James Bullard said on Monday that the central bank needs to raise the interest rate another two times to tame the stubborn inflation. “I think we’re going to have to grind higher with the policy rate in order to put downward pressure on inflation,” Bullard said speaking at an event in Florida.
Minneapolis Fed President Neel Kashkari said while interacting with media that he was okay to not go for another rate hike in June meeting, but the central bank should signal that they are not done.
Bullard and Kashkari’s hawkish comments came after US Fed Chair Jerome Powell on Friday said that due to stress in the banking sector, the interest rates may not be required to rise as much as expected before.
According to the CME FedWatch tool, about 71% of Fed fund futures traders are expecting the US Federal Reserve to keep the rates unchanged, while the rest see a 25-basis-point hike in June.
On the domestic front, traders lacked firm cues after they received fixed rates in the previous trading session over anticipation of easing liquidity, dealers said. “Domestically, nobody received, and there was appetite for paying,” a dealer at a private bank said. “But, from here the rates won’t go up, there will be receiving at 6.10-6.12% (in the five-year swap rates).”
OUTLOOK
On Wednesday, swap rates are seen opening steady due to lack of significant domestic cues, dealers said. Traders keenly await the US Federal Open Market Committee meeting minutes, scheduled to be released later in the day.
Fed meeting minutes may give the market insight into rate trajectory of the world’s largest economy.
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 6.50-6.60%, and the five-year at 5.95-6.11%.
End
Edited by Deepshikha Bhardwaj
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