Informist, Thursday, Nov 23, 2023
By Aaryan Khanna
NEW DELHI – Overnight indexed swap rates ended higher as US Treasury yields rose slightly, and mutual funds continued paying fixed rates to protect their underlying investments in bonds, dealers said.
The one-year swap rate settled at 6.91%, compared with 6.89% on Wednesday. The five-year swap rate ended at 6.59%, against 6.54% the previous day.
The yield on the benchmark 10-year US Treasury note settled at 4.41% on Wednesday, rising from 4.38% at the time of the Indian market close on the same day. Fresh economic data muddied the outlook for interest rates in the world’s largest economy.
Fresh unemployment insurance claims for the week ended Saturday were at 209,000, down 24,000 from the previous week’s level. The claims were lower than market expectations of 226,000, according to a Reuters poll.
On the other hand, the University of Michigan’s survey showed that inflation expectations of US consumers rose for the second consecutive month, despite growing signs that price increases are in fact slowing. The year-ahead inflation expectation was at 4.5% for November, up from 4.2% in October. Long-run inflation expectations rose to 3.2% from 3.0% last month.
However, trade volumes dropped today in the five-year segment. US Treasury yields did not lend cues during the day as the notes were not traded due to the Thanksgiving holiday in the US, dealers said.
“They are moving in a range, there is definitely no movement in rate expectations,” a dealer at a foreign bank said. “We have just gone back to yesterday’s (Wednesday’s) level, because US yields are back above 4.40%. No real surprises there.”
Swap rates are factoring in repo rate cuts only after a year, with no triggers to bring forward that view in the near term, dealers said. Short-term swap rates have been trading in a thin band even as the movement in the five-year OIS rate has been volatile.
The overnight Mumbai Interbank Offer Rate–the floating leg of the OIS contract–was set at 6.89% today as a large liquidity deficit pushed up the cost of funds in the money market. At the end of trade on Wednesday, liquidity in the banking system was in a deficit of 1.77 trln rupees, as against 1.74 trln rupees on Tuesday, according to RBI data. The liquidity deficit on Tuesday was then the highest since at least 2013, before being surpassed by today’s gap.
Mutual funds have been paying fixed rates through the week as they were betting that the spread between the five-year overnight indexed swap rate and the corresponding yields on debt securities is likely to shrink. Meanwhile, foreign banks received fixed rates, though their activity was less aggressive lacking client flows due to the holiday in the US, dealers said.
“I think foreign banks are more comfortable receiving OIS (rates) rather than investing in bonds for their bets on the Indian market,” a dealer at a private bank said. “There are both barriers to entry there and higher capital requirements. It’s better for foreign funds to stay in this market.”
OUTLOOK
On Friday, swap rates may open steady due to lack of significant domestic or offshore cues on interest rates, dealers said.
A sharp move in crude oil prices may also lend cues at the opening. US financial markets will close early on Friday ahead of the Thanksgiving weekend, and are shut today.
The swap rate in the one-year segment is seen at 6.78-7.00% and in the five-year segment at 6.35-6.60%.
End
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Maheswaran Parameswaran
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