Informist, Thursday, May 25, 2023
By Nishat Anjum
MUMBAI – Overnight indexed swap rates ended higher as traders paid fixed rates tracking a rise in US Treasury yields, dealers said. However, volume remained low as traders avoided large bets due to lack of significant domestic cues.
The one-year swap rate settled at 6.56% against 6.55% on Wednesday, while the five-year swap rate ended at 6.08% against 6.03% on the previous trading day. Five-year swap rate failed to rise above the key level of 6.08% as traders unwound their paid bets at that level to make profit, dealers said.
US Treasury yields rose as the impasse over debt ceiling negotiations continued even as the deadline looms nearer. The yield on the benchmark 10-year US Treasury note rose to 3.77% from 3.67% at the end of Indian market hours on Wednesday. Amidst the debt crisis anxiety and commentary from the Fed officials, US Treasury yields reached its highest levels since Mar 10.
US President Joe Biden and US House Speaker Kevin McCarthy held “productive talks” to seek a deal to increase the $31.4 trln debt ceiling and avoid a default on its payment obligations. The world’s largest economy is just eight days away from defaulting on its payment obligation which may have cascading effects on financial markets across the world. This weighed on investors’ risk sentiments.
“The worst has already been priced in by US yields, today it reached 3.75%, so the negative rating (by Fitch) has also been priced in,” a dealer at a primary dealership said. “Now any impact that has to happen will only show up on Jun 1.”
Credit rating company Fitch put the US’ AAA rating on negative watch in a precursor to a possible downgrade, should the world’s largest economy default on its payment obligation.
Fed futures traders now increasingly except the US-rate setting panel to not raise rate next month and then resume its tightening policy in July. The market is factoring around 66% probability that the Fed will leave interest rates unchanged in its June meeting, according to the CME FedWatch tool. However, close to 46% future traders expects a 25-basis-point rate hike in July.
The chances of the Fed opting for rate cuts this year have increasingly become low, despite inflation inching down, dealers said. Even back home, the market remains uncertain regarding the rate cuts, hence the limited bets in the shorter-term swap rates, dealers said. “There has no change in view regarding rate cuts,” a dealer at a private bank said. “Nobody wants to take bets in such uncertainty. On top of that, there was muted activity overall.”
OUTLOOK
On Friday, swap rates are seen opening steady due to lack of significant domestic cues, dealers said. Traders may also take cues from US unemployment insurance weekly claims report, scheduled to be released at 1800 IST.
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 6.00-6.15%.
End
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Maheswaran Parameswaran
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