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India IRS Review: End off lows tracking rise in crude, US yields

Informist, Monday, Jul 25, 2022


By Aaryan Khanna


NEW DELHI – Overnight indexed swap rates ended off their lows, tracking a rise in crude oil prices and US Treasury yields during the day, which led traders to unwind their received fixed rate bets, dealers said.


The one-year overnight indexed swap rate settled at 6.29% as against 6.31% on Friday. The five-year swap rate ended at 6.47% as against 6.49% the previous day.


Brent crude for September delivery surged to $104.57 a bbl at the end of Indian market hours from $101.64 a bbl in Asian trade earlier. This was due to supply fears and steady demand in Asia even as steep monetary policy tightening is expected to limit the gains for the commodity.


Typically, a rise in crude oil prices increases the risk of imported inflation in India, putting pressure on the Reserve Bank of India to withdraw monetary policy accommodation.


Meanwhile, the yield on the 10-year benchmark US Treasury note gained 3 basis points from Friday to reach 2.81% at the end of Indian market hours. 


Noting the decrease in the spread of one- and five-year OIS rates, traders booked profits on their bear flattener trades, dealers said. Traders had taken bear flattener bets earlier, where they paid fixed rates in short-term swaps and received fixed rates in longer tenures.


“Traders will take any opportunity to book profits and square off their bear flatteners now that the spreads have shrunk so much,” a dealer at a foreign bank said.


Earlier, the one-year swap had fallen to 4.27%, while the five-year contract slumped to as low as 7.41% due to the softening of global cues on Friday.


The yield on the 10-year benchmark US Treasury note had slumped on Friday due to demand for haven assets ahead of the US Federal Open Market Committee’s meeting outcome later this week.


The US Federal Reserve’s rate-setting panel is expected to hike rates by 75 bps at the policy review, with outlying bets for a 100-bps hike.


Investors also exercised caution after the European Central Bank hiked rates by 50 bps last week, with rapid and coordinated rate hikes seen as a precursor to an economic slowdown and a possible recession.


In the US, Germany and France, the purchasing managers’ index for July slipped into contraction, according to preliminary data released on Friday.


Meanwhile, Brent crude for September delivery also slipped 0.6% on Friday, decreasing the chances of imported price pressures pushing up domestic inflation, dealers said.


“The offshore market had the bigger move before the opening, driven by the fall in US Treasury yields, which are now significantly below the 3% mark (on the 10-year US yield),” a dealer at primary dealership said.



On Tuesday, swap rates are seen steady as traders may avoid large bets on caution ahead of the US Federal Open Market Committee’s meeting outcome on Wednesday.


The US Federal Reserve’s rate-setting panel is expected to hike rates by 75 bps at the policy review, with outlying bets for a 100-bps hike.


Volatility in swaps may also be limited due to a lack of significant domestic cues on interest rates.


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


The swap rate in the one-year segment is seen at 6.20-6.45%, and the five-year segment at 6.35-6.60%.



At 1530 IST


1-year OIS



2-year OIS



5-year OIS



2-year MIFOR


5-year MIFOR





US$1 = 79.73 rupees

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


Edited by Namrata Rao



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Source: Cogencis

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