Informist, Friday, Sep 24, 2021
By Vaibhav Chakraborty
NEW DELHI – Overnight indexed swap rates surged today tracking an overnight jump in the US Treasury yields as investors across the globe digested the US Federal Reserve’s eventual timeline for tapering of its asset purchase programme, dealers said.
The one-year rate ended at 3.92% against Thursday’s close of 3.88%, while the five-year swap rate ended at 5.25%, against the previous close of 5.16%.
The 10-year benchmark US Treasury note yields surged 9 basis points to settle at a two-month high of 1.41% on Thursday.
At the conclusion of the US Federal Open Market Committee’s meet on Wednesday, policymakers suggested that the economy had made substantial progress for the central bank to moderate its pace of asset purchases soon. During a press briefing, US Fed Chair Jerome Powell suggested that the tapering of its asset purchases could begin as soon as November.
With the US Fed expected to unwind its $120 bln asset purchase programme by mid-2022, traders believe that more than the likely commencement from November it is the pace with which the US central bank is expected to unwind that has spooked investors globally, dealers said.
A rise in US Treasury yields narrows the interest rate differential between the safe-haven asset and emerging market debt, making the latter less appealing for foreign investors.
“Swaps witnessed heavy paying across board today largely tracking US yields (which reacted to Fed’s taper comments at the policy) and due to rise in crude (oil) prices as well,” a dealer with a primary dealership said.
“I guess the timeline for tapering and also the shift in view on interest rate hikes by a majority of the members indicate that the pace of unwinding is going to be a bit faster than market was hoping for,” the dealer added.
Moreover, traders believed that the heavy paying of fixed rates in shorter-tenure swap rates was driven by the fear of an earlier-than-expected hike in interest rates by the US Fed. The Fed’s updated quarterly projections showed that officials are now evenly split on whether the federal funds rate should be raised as soon as next year, dealers said.
In June, the median of the median estimate of US FOMC participants indicated no rate hikes until 2023.
Moreover, with the crude oil prices breaching crucial psychological levels of $75 and $77, traders were prompted to pay fixed interest rates as high crude oil poses upside risk of imported inflation, dealers said.
The Brent crude oil futures contract for November delivery rose $1.06 higher than the previous close of $76.19 per barrel on Thursday, topping the psychologically crucial mark of $77/bbl. The contract was largely unchanged today.
OUTLOOK
Swap rates are not traded on Saturday.
On Monday, OIS rates will open steady as dealers may avoid large bets due to lack of significant domestic cues on rates.
Rates are now seen trading within a narrow band in the near term, in the run up to the RBI’s monetary policy meeting scheduled for early October.
Any sharp movement in crude oil prices and US Treasury yields overnight may lend cues at open.
The swap rate in the one-year segment is seen at 3.80-4.00%, and in the five-year at 5.10-5.35%.
End
US$1 = 73.70 rupees
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Michael Correya
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Source: Cogencis
