Informist, Wednesday, Jan 19, 2022
By Aaryan Khanna
NEW DELHI – Overnight indexed swap rates ended on a mixed note today, with the five-year OIS rate ending off highs as traders received fixed rates after the swap breached the key 5.70% mark despite global cues putting upward pressure, dealers said.
The one-year swap rate ended at 4.44%, flat against the previous close, while the five-year swap rate ended at 5.66% against 5.69% on Tuesday.
Traders received fixed rates on the view that global cues may not have a further hand in pushing domestic interest rates higher over the medium term, dealers said.
Further, some traders booked profits and received interest rates noting the recent surge in long-term OIS rates. At its close on Tuesday, the five-year swap rate had jumped 32 basis points this month, and was as high as 37 bps today.
Early in the day, traders were keen to pay higher rates in the five-year OIS rate noting an overnight surge in US Treasury yields, as well as a rise in crude oil prices.
US Treasury yields jumped to pre-pandemic levels due to the possibility of more aggressive policy tightening by the Federal Reserve to tackle surging inflation. After several officials signalled the Fed would start raising interest rates in March, investors globally focussed on the Federal Open Market Committee’s Jan 25-26 meeting.
Market participants have turned more aggressive about the outlook for the Fed’s policy tightening. According to CME Group’s FedWatch tool, interest rate futures markets indicate investors are now betting on four to five interest rate increases this year, up from three to four on Friday.
The yield on the 10-year US Treasury note rose to a fresh two-year high of 1.87% on Tuesday, up 9 basis points since Friday.
Brent crude oil March futures jumped over $1 per bbl overnight to $87.51 per bbl on Tuesday, and rose further to $88.38 per bbl by the end of Indian market hours today.
“We may have come to a situation in both the markets (gilts and OIS) where overseas cues have burst and any further movement upward may not translate due to a corresponding jump in levels,” a dealer at a primary dealership said.
Meanwhile, traders avoided aggressive bets in short-term swap rates due to lack of significant cues.
The current one-year OIS rate factors in an aggressive path of the RBI unwinding its accommodative monetary policy.
Consumer inflation over the next three and six months is seen within the RBI’s 2-6% comfort band, which prevented traders paying higher fixed rates among shorter-maturity swaps, dealers said.
Dealers were of the view that short-term OIS rates may consolidate at current levels in the near term, and if the RBI is seen maintaining a benign pace of policy unwinding at its February policy review, traders would unwind their paid bets in the one-year swap rate.
“There is a realignment towards the higher fixed rates, but the one-year OIS is at the upper end of where it should be heading into the February policy, I would expect a similar receiving pattern like the five-year swap here sooner rather than later,” a dealer at a private bank said.
OUTLOOK
Swap rates are seen steady on Thursday as traders may keep to the sidelines due to lack of significant cues for interest rates.
Any sharp movement in US Treasury yields and crude oil prices might lend cues at open.
The swap rate in the one-year segment is seen at 4.30-4.55% and the five-year at 5.55-5.80%.
End
US$1 = 74.43 rupees
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Source: Cogencis
