Informist, Wednesday, Jun 21, 2023
By Nishat Anjum and Aaryan Khanna
MUMBAI – Overnight indexed swap rates inched up ahead of key events for US and UK interest rates, led by offshore investors paying fixed rates in the five-year segment on fears that monetary policy tightening may continue, dealers said.
The one-year swap rate ended at 6.68%, as compared to 6.66% on Tuesday, while the five-year swap rate closed at 6.22% against the previous close of 6.19%.
During the day, traders paid fixed rates in the long-term swap rates after higher-than-expected UK May Consumer Price Index data, dealers said. Headline inflation in the UK rose 8.7% on year in May, and 0.7% on month. Economists polled by Reuters had projected an annual rise of 8.4% in the headline inflation.
The yield on the benchmark 10-year US Treasury note rose to 3.76% during the day from the day’s low of 3.73%. However, the US Treasury soon pared the losses and yield on the US Treasury note fell back to 3.73%. As a result, back home, traders received fixed rates tracking the fall, dealers said.
Towards the end of trade, investor worries grew ahead of the Bank of England’s monetary policy review on Thursday regarding the size and pace of interest rate hikes by the central bank to control persistently high inflation. The UK central bank could hike rates by 50 basis points on Thursday, which spurred some traders to pay fixed rates again, dealers said.
“There is some nervousness in the market, which is reflective in the swap rates from a few days,” a dealer at a primary dealership said. “Once things clear up on the global front, then maybe our market will see offshore flows at least.”
The five-year swap rate has climbed for the last three days and risen 7 bps this week.
Trade volumes in the short-term swaps were low as the domestic market lacked any fresh interest rate cues on the domestic front, dealers said. For most of the day, traders refrained from placing aggressive bets ahead of the US Federal Reserve Chair Jerome Powell’s testimony at the Capitol Hill, scheduled for today and Thursday.
According to the CME’s FedWatch tool, close to 77% of Fed fund futures traders expect the US rate-setting panel to hike the federal fund rate by 25 bps at its July meeting, while the rest expect it to remain unchanged at 5.00-5.25%.
At its June monetary policy meeting, the US central bank kept the policy rate steady for the first time since March 2022. However, according to the median of projections by Fed officials, the policy rate is seen at 5.50-5.75% at the end of 2023, 50 bps higher from the previous projection in March.
While the trajectory of US interest rates is closely eyed, the Reserve Bank of India’s Monetary Policy Committee is still expected to maintain status quo on rates at least until the end of 2023, and possibly beyond, dealers said.
“Short-term rates are not dictated by all this positioning by the overseas players,” a dealer at a private bank said. “Obviously, the flows are impacting the market, but the view has not changed, that there are no more RBI rate hikes.”
OUTLOOK
On Thursday, swap rates are seen steady as the market lacks significant domestic cues, dealers said.
Market participants will focus on the Bank of England’s monetary policy meeting on Thursday.
Moreover, US Federal Chair Jerome Powell is scheduled to testify before the US Congress later in the day and Thursday. Traders may take cues from Powell’s testimony about future rate action in the US.
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 6.60-6.80%, and the five-year at 6.00-6.25%.
End
Edited by Tanima Banerjee
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