Informist, Thursday, Oct 21, 2021
By Aaryan Khanna
NEW DELHI – Overnight indexed swaps ended lower after a recent surge as dealers unwound their paid fixed-rate positions on the view that the heavy paying across maturities was overdone, led by a slump in the five-year swap rate.
The one-year rate ended at 4.15% against 4.18% on Wednesday, while the five-year swap rate ended at 5.57% against the previous close of 5.63%.
The one-year OIS rate had surged 15 basis points over the week to Wednesday, while the five-year rate had shot up by 19 bps over the same period.
A jump in crude oil prices and US Treasury yields were the primary reasons behind the sharp rise in the five-year OIS.
Domestic gilt yields also rose sharply over the last week, which made dealers pay heavily in the swaps market to protect their underlying gilt holdings.
As gilt yields retreated on the expectation of a special open market operation being announced by the Reserve Bank of India after market hours today, traders unwound their bets by a similar margin, dealers said.
“The hedging pressure has come down sharply, if you look at what people were paying at with 6.40% (yield on the 10-year benchmark) versus 6.34-6.35% now, there was definitely room to unwind since (swap) rates had shot up,” a dealer at a primary dealership said.
Traders who had placed aggressive bets on a jump in crude oil held their positions in early trade, as the Brent crude oil futures contract for December settled at a three-year high of $85.82 per barrel on Wednesday.
However, they soon unwound their paid fixed-rate bets as the contract fell below the psychologically-crucial $85 per bbl by the end of market hours.
The one-year swap rate also fell on a similar sentiment. The surge in the short-term swap was propelled by traders who took bets that evolving global cues could lead the RBI to normalise its monetary policy faster than expected.
However, with no policy announcements scheduled till December and as well as global cues steady, traders were unwilling to pay a premium for one-year swaps, especially as overnight MIBOR rates stuck to a thin band around the reverse repo rate of 3.35%, dealers said.
“The one-year rate can’t go much higher, right now it’s factoring in overnight rates to go up by something like 100 basis points over the next year to be a good trade, so whoever is paying is being too aggressive at those levels,” a trader at a private bank said.
OUTLOOK
On Friday, 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.
Moreover, traders may keep to the sidelines ahead of the release of the minutes of the RBI’s Monetary Policy Committee meet for October after market hours on Friday.
Any sharp movement in US Treasury yields and crude oil prices overnight may also lend cues at the open.
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 = 74.86 rupees
Edited by Aditya Sakorkar
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