Informist, Wednesday, Oct 20, 2021
By Aaryan Khanna
NEW DELHI – Overnight indexed swap rates ended on a mixed note today with the five-year swap off-highs while the one-year swap rose tracking an overnight surge in US Treasury yields.
The one-year rate ended at 4.18% against 4.14% on Monday, while the five-year swap rate ended at 5.63% against the previous close of 5.61%.
Global investors exited US Treasury holdings after Federal Reserve Governor Christopher Waller on Tuesday gave the clearest indication yet that the Fed’s rate-setting committee would begin unwinding monetary stimulus next month, adding that interest rate hikes were a while away.
“While there is still room to improve on the employment leg of our mandate, I believe we have made enough progress such that tapering of our asset purchases should commence following our (Federal Open Market Committee) next meeting,” Waller said in a speech to Stanford Institute for Economic Policy Research.
The statement followed minutes of the committee’s September meet released last week, which said policymakers were considering tapering the Fed’s asset purchases in either mid-November or at the subsequent policy meet in December.
Yield on the 10-year US Treasury note ended 6 basis points higher to settle at 1.65% on Tuesday, a five-month high.
Further, as the one-year swap rate had not risen as much as the other most-liquid rates on Monday, traders opted to pay in the tenure on the view that the RBI’s normalisation path may be steeper than expected due to global cues.
While the one-year segment was up 9 basis points on Monday, the two-year OIS surged 13 bps while the five-year swap rate ended 15 bps higher than its previous close.
“One-year movement wasn’t anything special, it just caught up with the other swaps from because everything from six months to five years has shot up since this crude story has accelerated over the past week,” a dealer at a private bank said.
Offshore paying interest also led to a rise in long-term swap rates, dealers said. However, the five-year OIS, typically the biggest mover on global cues, ended off-highs as some domestic traders unwound paid fixed rate positions because the Brent crude oil futures for December came off multi-year highs and sustained sharply below the psychologically-crucial $85-per-barrel mark today.
Traders had paid fixed rates on Monday on bets that the contract would rise above the $85.49 per bbl at the close of market hours on Monday. Further, a late recovery in government bonds led to OIS traders unwinding paid positions taken to protect their underlying gilt holdings, dealers said.
“There was still plenty of offshore paying in the five-year (swap rate), some domestic unwinding came in because of the gilts recovery, but the paying side won because of the impending (Fed) taper,” a dealer at a foreign bank said.
OUTLOOK
On Thursday, OIS rates may open steady due to lack of significant domestic cues on rates as dealers may avoid large bets in a truncated week.
Swap rates are expected to stay in a narrow range due to the recent volatility. However, with aggressive bets on higher crude oil prices, traders may unwind their paid fixed positions in case prices of the commodity remain in a thin band or fall, dealers said.
Any sharp movement in US Treasury yields overnight may also lend cues at open on Thursday.
The swap rate in the one-year segment is seen at 4.00-4.25%, and in the five-year at 5.45-5.70%.
End
US$1 = 74.87 rupees
Edited by Aditya Sakorkar
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Source: Cogencis
