Informist, Tuesday, Sep 13, 2022
By Aaryan Khanna
NEW DELHI – Overnight indexed rates ended on a mixed note, with the five-year swap rate coming off highs due to heavy inflows from a large bank which received fixed rates, dealers said. The one-year contract rose today.
The one-year overnight indexed swap rate settled at 6.32% as against 6.29% on Monday. The five-year swap rate closed at 6.32% as against 6.34% the previous day.
The large bank likely received fixed rates to mitigate interest rate risk on a bond it issued today which matures in seven years, dealers said. Traders also persistently received fixed rates anticipating further flows, which offset an early rise in the five-year OIS rate to 6.39%, dealers said.
Traders paid higher fixed rates early in the day to protect their underlying gilt holdings after stocking up on dated securities. The yield on the 10-year benchmark 7.26%, 2032 bond fell 6 basis points to 7.08% today.
Traders avoided booking profits on government bonds and expanded their portfolios on hopes of Indian sovereign debt’s inclusion in JPMorgan Global Bond Index – Emerging Markets, dealers said.
This spurred overseas traders in swap rates to pay fixed rates, particularly in the five-year contract, dealers said.
“No one is willing to sell in gilts, so traders have moved to the OIS market, which saw keen hedging interest on both the paying and receiving sides today,” a dealer at a foreign bank said.
Meanwhile, the one-year swap rate rose largely as offshore traders paid fixed rates because of a sharp rise in near-term US Treasury yields, dealers said.
On Monday, the yield on the policy-sensitive two-year US Treasury note rose to its highest level since November 2007, which spurred paying interest from overseas traders in the one- and two-year domestic swap rates, dealers said.
Globally, investors bet that the US Federal Reserve would opt for a third consecutive 75-basis-point rate hike later this month despite expectations of inflation softening in August.
The US CPI print for August, due later today, is expected to show that inflation in the US cooled to 8.0% in August from 8.5% in July, according to median estimates from The Wall Street Journal.
With the five-year OIS rate edging lower, three key points on the swap curve–at one year, two years and five years—are now at the same rate of 6.32%.
Dealers were wary of receiving fixed rates in short-term swaps as the Reserve Bank of India’s Monetary Policy Committee is likely to raise rates in the upcoming meeting, particularly because India’s CPI inflation in August rose to 7.00% from 6.71% in July.
However, paying pressures were mitigated as the print was along expected lines and did not result in a rise in the rate view, dealers said. Retail inflation was expected at 6.9%, according to an Informist poll of 22 economists.
“Considering that the terminal (repo) rate view remains around 6.00-6.25%, I don’t think there is too much scope to receive from here,” a dealer at a private bank said.
On Wednesday, swap rates are seen opening steady as traders remain on the sidelines, following a lack of significant domestic cues.
Traders may take cues from the US CPI inflation print for August, due later today.
Any movement in US Treasury yields and crude oil prices may also lend cues at open.
The swap rate in the one-year segment is seen at 6.20-6.45%, and in the five-year segment at 6.25-6.50%.
Edited by Namrata Rao
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