Informist, Wednesday, Nov 29, 2023
By Aaryan Khanna
NEW DELHI – Overnight indexed swap rates ended lower, tracking an overnight slump in US Treasury yields following comments from US Federal Reserve Governor Christopher Waller, who suggested that policy rate cuts are on the horizon, dealers said.
The one-year swap rate settled at 6.86%, compared with 6.90% on Tuesday. The five-year swap rate ended at 6.48%, compared with 6.57% the previous day, ending below the policy repo rate of 6.50% for the first time since Nov 17.
If inflation continues to fall “for several more months…three months, four months, five months…we could start lowering the policy rate just because inflation is lower,” Waller said on Tuesday.
The yield on the benchmark 10-year US Treasury note fell to 4.29% at the end of Indian market hours today, as against 4.41% on Tuesday. Foreign banks have already unwound a majority of their fixed rate bets as the benchmark US yield has eased from over 5%, and are now receiving fixed rates in large volumes, dealers said.
According to CME Group’s FedWatch tool, the first sign of a rate cut is in March, with 40.4% Fed Fund futures traders expecting a rate cut then, doubling from the previous day. Nearly half of the traders expect at least a 25-basis-point reduction in the policy rate by May 1. Currently, the key interest rate in the US is at 5.25-5.50%.
“Breaking 4.35% means the US yield could go down to 4.10% even, which will reflect more on swaps than bonds,” a dealer at a private bank said. “If you don’t think there is an immediate rally coming, this looks like a good level to pay.”
Domestic traders paid fixed rates in significant quantities as the five-year swap rate fell below 6.50%, which had a significant positive carry against the Mumbai Interbank Offer Rate – the floating leg of the OIS contract. The overnight MIBOR was set at 6.90%, well above the policy repo rate.
With the Reserve Bank of India seen easing liquidity and bringing overnight rates down by March, paying fixed rates at these levels ensured that returns would be positive even if monetary policy eased in the next six months, taking cues from the US, dealers said.
On the domestic front, traders were cautious ahead of the GDP data release for Jul-Sep, scheduled for 1730 IST on Thursday. Traders seek further signals on India’s monetary policy at the Monetary Policy Committee meeting on Dec 6-8 before receiving OIS rates up to one-year aggressively, dealers said.
Rate cuts in India still seem unlikely within the next 12 months, even as some hope was creeping in that India’s rate-setting panel could also cut rates in Jul-Sep if the US Federal Open Market Committee begins lowering rates by June, dealers said.
“In the US, they are factoring some rate cuts in March, but that’s miniscule,” a dealer at a primary dealership said. “Back home, I feel we need concrete data on the inflation front before getting to the cuts.”
OUTLOOK
On Thursday, swap rates are seen taking cues from the reaction in US Treasury yields after the second estimate for US GDP data for Jul-Sep is released after market hours today, dealers said.
US GDP likely grew by 4.3% on year in the September quarter, according to a poll by Reuters. The first estimate showed an increase of 4.9% on year.
Inflation data in the US will also be closely watched on Thursday, as will India’s GDP print for Jul-Sep at 1730 IST on Thursday.
India’s GDP growth is likely to have eased to 6.8% in the September quarter from a four-quarter high of 7.8% in Apr-Jun, as the statistical effect of a low base normalises, according to a poll of 21 economists by Informist.
A sharp move in crude oil prices may also lend cues at the opening.
The swap rate in the one-year segment is seen at 6.78-7.00%, and in the five-year segment at 6.40-6.60%.
End
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Tanima Banerjee
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.
Informist Media Tel +91 (11) 4220-1000
Send comments to [email protected]
© Informist Media Pvt. Ltd. 2023. All rights reserved.
Source: Cogencis