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Thursday, October 6, 2022

India IRS Review: Surge tracking rise in US ylds on Fed rate view

Informist, Thursday, Jul 7, 2022


By Aaryan Khanna


NEW DELHI – Overnight indexed swap rate surged tracking a sharp overnight rise in US Treasury yields as minutes of the Federal Reserve’s most recent meeting indicated that the central bank could pursue a more restrictive monetary policy to combat rising inflation, dealers said.


The one-year overnight indexed swap rate settled at 6.29% as against 6.23% on Wednesday, and the five-year swap rate fell to 6.74% from its previous close of 6.66%.


The minutes of the Fed’s June policy review, released after market hours on Wednesday, indicated that policymakers intend to stick with a 50-basis-point or 75 bps rate hike in the upcoming meeting at the end of this month, dealers said.


Fears of an economic downturn and a possible recession in the US underpinned paid fixed rate bets in the domestic OIS market, limiting the rise in swap rates. On the other hand, strong services Purchasing Managers’ Index data for June in the US suggested the Federal Open Market Committee would be well served to bring down multi-decade high inflation.


The yield on the benchmark 10-year US Treasury note jumped 10 bps to 2.92% on Wednesday, and was at 2.98% at the end of Indian market hours.


“This is more of a fundamental thing, that the minutes would be hawkish for June when the US raised rates by 75 bps already, so the reaction in US Treasury yields was slightly unexpected,” a dealer at a primary dealership said.


Initially, an overnight fall in crude oil prices limited a surge in the five-year OIS, but traders paid fixed rates after the benchmark US yield soared past 2.95% in the beginning of European trade, dealers said.


On the domestic front, dealers were uncertain about the pace of hikes the Indian central bank would favour as commodity prices, including those of crude oil, eased from recent highs. Unlike Wednesday, most traders bet on a 50 bps rate hike in August, with the domestic policy meet only a week after the US Federal Open Market Committee meeting.


Moreover, RBI’s slew of measures on Wednesday to usher in foreign exchange inflows raised concerns that the central bank may also mull sharp rate hikes to keep pace with the US Fed and protect domestic asset prices, dealers said.


“We may see an outside possibility where the RBI is now focused on rate hikes not as a measure of inflation control but rather necessary to curb capital outflows, which keeps pressures on repo rate in August to the upside,” a dealer at a private bank said.



On Friday, swaps are seen steady after recent volatility and due to a lack of significant domestic cues on interest rates.


Any sharp movement in crude oil prices and US Treasury yields might lend cues when the market opens.


The swap rate in the one-year segment is seen at 6.10-6.45%, and the five-year at 6.55-6.80%.



At 1530 IST


1-year OIS



2-year OIS



5-year OIS



2-year MIFOR


5-year MIFOR





US$1 = 79.18 rupees


Edited by Deepshikha Bhardwaj



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Source: Cogencis

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