Informist, Tuesday, Feb 6, 2024
By Nishat Anjum
MUMBAI – Overnight indexed swap rates recovered from the day’s lows, as traders paid fixed rates, tracking a rise in US yields, dealers said. In early trade, swap rates fell as traders received fixed rates at levels considered lucrative.
The one-year swap rate settled at 6.61%, against 6.63% on Monday. The five-year swap rate ended at 6.23%, against 6.22% on the previous trading day. During the day, the one-year swap fell to 6.59%, while the five-year swap fell to 6.18%.
“A bit of positive momentum was influenced by the government bond market as well, and then the levels to receive were also good,” a dealer at a private bank said. “After that, it largely tracked US yields only.”
The yield on the 10-year benchmark US Treasury note surged to 4.16% from 4.09% at the close of trading in Indian markets on Monday. US yields surged on Monday as investors assessed the strong services sector growth in January, which reinforced the belief that the US Federal Reserve is unlikely to cut interest rates anytime soon.
According to CME Group’s FedWatch tool, 85% of Fed Fund Futures traders expect the federal funds interest rate to be retained at 5.25-5.50% at the March meeting. However, 54% of them expect a 25-basis-point rate cut in May.
The latest data showed that the US services sector expanded more rapidly than expected in January. The non-manufacturing Purchasing Managers’ Index, which the Institute of Supply Management released on Monday, increased to 53.4 in January from 50.5 the previous month. The reading was also higher than the 52.0 projected by a Reuters poll. A figure above 50 indicates expansion, while one below it shows contraction.
On the domestic front, the market is keeping a close watch on the outcome of the Reserve Bank of India’s Monetary Policy Committee three-day meeting, scheduled for Thursday, dealers said. The rate-setting is expected to leave the policy repo rate unchanged at 6.50%, according to a poll by Informist. The focus will be on whether the members of the panel think it is time to change the policy stance of ‘withdrawal of accommodation’. Also in focus will be measures by the central bank to ease the large liquidity deficit in the banking system.
“The flows in the morning were probably punting on the MPC. There are still people who are expecting a softer tone or change in stance to neutral,” a dealer at a primary dealership said. “If they want to do VRR (variable rate repo) and VRRR (variable rate reverse repo) both, they can just change the stance to neutral, and continue the liquidity management.”
Some traders expect a change in policy stance to ‘neutral’ from ‘withdrawal of accommodation’ at the policy review, dealers said. Others think variable rate reverse repo auctions conducted by the central bank might be an indication that it’s too early for a stance change.
With expectations of a rate cut in March by the Fed fading, expectations of a rate cut by the RBI’s rate-setting panel have also been pushed back, dealers said. A section of the market now expects the Monetary Policy Committee to cut the repo rate in August, against the earlier expectation of June.
OUTLOOK
On Wednesday, swap rates may open steady due to caution ahead of the outcome of the Monetary Policy Committee’s meeting on Thursday, dealers said.
A sharp movement in US Treasury yields or crude oil prices may also lend cues at opening.
The swap rate in the one-year segment is seen at 6.50-6.65% and in the five-year segment at 6.10-6.25%.
End
Edited by Avishek Dutta
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