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Wednesday, December 7, 2022

India IRS Review: Rise as US ylds surge on sharp Fed rate hike view

Informist, Friday, Oct 21, 2022

 

By Aaryan Khanna

 

NEW DELHI – Overnight indexed swap rates ended higher today tracking a surge in US Treasury yields on comments from Federal Reserve officials this week that interest rates could rise more than expected, dealers said.

 

The one-year overnight indexed swap rate settled at 7.08% as against 7.04% on Thursday, while the five-year swap closed at 7.07% compared to 6.98% the previous day.

 

On Thursday, Philadelphia Federal Reserve President Patrick Harker said the US central bank was open to hiking policy rates well beyond 4% in 2022, and hold them at restrictive levels to combat soaring inflation.

 

The remarks echoed comments from Federal Open Market Committee voters Neel Kashkari and James Bullard earlier this week, which raised fears of sharp rate hikes extending into 2023.

 

The yield on the 10-year benchmark US Treasury note surged 10 basis points to 4.24% on Thursday, hitting levels last seen during the global financial crisis in 2008.

 

“The OIS market is well positioned for (domestic) rate hikes, but there was volatility and some paying as US yields rose,” a dealer at a private bank said. “A lot of it is still not being reflected accurately, even in swaps, because of the (India) rate view.”

 

In India, the policy repo rate is seen topping out at 6.50% on the back of two rate increases, by 35 bps and 25 bps over the next two policy reviews, respectively.

 

The minutes of the Reserve Bank of India Monetary Policy Committee’s September meeting showed some members were wary of continuing with aggressive rate increases, which gave confidence to domestic investors to continue paying fixed rates for marked-to-market gains, dealers said.

 

The view anchored OIS contracts maturing in up to two years, which rose far less than those in the five-year segment.

 

Offshore flows also capped the rise in OIS rates on hopes the political turmoil in the UK would subside going forward, dealers said.

 

UK Prime Minister Liz Truss resigned on Thursday after a tumultuous six weeks as the head of government. The fallout from the unpopular “mini-budget”, which pushed up the government’s borrowing costs and weakened the pound sterling, led to her exit.

 

With the resignation, foreign funds, whose flows had driven up OIS rates earlier, unwound their fixed rate bets in India on the hopes of a more stable regime in the UK, dealers said.

 

“There was some unwinding of offshore positions today since the situation on the European front has calmed down, and the debt outlook there is in a better state,” a dealer at a foreign bank said. 

 

OUTLOOK

OIS rates are not traded on Saturday. Money markets are shut on Monday for Diwali.

 

On Tuesday, swap rates may open steady due to a lack of significant domestic cues on interest rates.

 

Any movement in US Treasury yields and crude oil prices may lend cues at open.

 

The swap rate in the one-year segment is seen at 6.90-7.15%, and in the five-year segment at 6.90-7.15%.

 

 

At 1530 IST

Thursday

1-year OIS

7.08%

7.04%

2-year OIS

7.01%

6.99%

5-year OIS

7.07%

6.98%

2-year MIFOR

6.75-6.87%6.85-6.97%

5-year MIFOR

6.97-7.09%7.01-7.13%

 

End

 

Edited by Aditya Sakorkar

 

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

 

Cogencis news is now Informist news. 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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© Informist Media Pvt. Ltd. 2022. All rights reserved.

Source: Cogencis

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