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India IRS Review:Surge tracking reversal in US ylds after Fed policy

Informist, Thursday, Jun 16, 2022


By Aaryan Khanna


NEW DELHI – Overnight indexed swap rates reversed an early fall and surged in the latter half of the day as traders paid fixed rates with US Treasury yields surging from overnight lows, dealers said.


The one-year swap rate ended at 6.56% against the previous close of 6.51%, and the five-year swap rate closed at 7.35% against 7.28% on Wednesday.


Early in the day, traders received fixed rates across maturities as the yield on the 10-year benchmark US Treasury note slumped following the US Federal Reserve’s policy review, dealers said. The US benchmark yield ended 15 basis points lower on Wednesday at 3.30%.


The US Federal Open Market Committee raised the federal funds rate target range by 75 bps to 1.50-1.75%, in line with the market’s expectations, and Fed officials said they expect to hike rates by 175 bps in the rest of the calendar year.


The Fed’s massive rate hike did not initially come as a surprise to the market, which had feared the central bank would take more drastic steps to curb soaring prices. US CPI inflation unexpectedly surged to a fresh four-decade high of 8.6% on year in May from 8.3% in April.


“From what we could see from the US Treasury market, domestic traders who had received were finally looking to gain after holding on to that view for weeks now, that the short-end swap curve was overpriced,” a dealer at a primary dealership said.


However, investors globally reassessed the interest rate trajectory laid out by Fed officials. The 10-year US benchmark yield jumped to 3.45% by the end of Indian market hours today, making up the entire fall on Wednesday, dealers said.


As US Treasury yields climbed, overseas investors paid fixed rates in domestic swaps to protect their underlying holdings in US debt, leading to a rise in OIS contracts maturing in over three years, dealers said.


Moreover, the sharp rate hikes projected by US Fed officials were seen exerting pressure on the Reserve Bank of India to aggressively hike rates, dealers said.


The Indian central bank may also take steps to shore up domestic rates, with another 50-75 bps hike projected in July. As off-cycle steps could not be ruled out, short-term OIS rates surged, dealers said.


“The RBI would like to keep a 300 bps difference between our rate and the US rate, to keep the yield differential in check and bond investors from exiting the country,” a dealer at a private bank said. 



On Friday, swaps are seen steady as traders may avoid large bets after the recent volatility and due to lack of significant domestic cues on interest rates.


OIS rates may inch up after the US Federal Reserve projected a sharp pace of rate increases at its policy review on Wednesday, which may be seen exerting pressure on domestic rate increases as well, dealers said.


Any sharp movement in crude oil prices might lend cues when the market opens.


The swap rate in the one-year segment is seen at 6.30-6.65%, and the five-year at 7.10-7.45%.



At 1530 IST


1-year OIS



2-year OIS



5-year OIS



2-year MIFOR


5-year MIFOR





US$1 = 78.07 rupees

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT


Edited by Avishek Dutta


Cogencis news is now Informist. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.


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Source: Cogencis

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