Informist, Tuesday, Jan 18, 2022
By Aaryan Khanna
NEW DELHI – Overnight index swap rates surged as traders paid sharply higher fixed rates, anticipating the policy outcomes of an overnight jump in US Treasury yields and crude oil prices above key levels.
The one-year swap rate ended at 4.44% against the previous close of 4.38%, while the five-year swap rate ended at 5.69% against Monday's close of 5.63%.
Overseas cues led traders to pay higher OIS rates in longer maturing swaps, with crude oil prices spiking due to an unfolding global economic recovery and US Treasury yields surging on bets that the Federal Reserve will hike rates more abruptly than expected.
Crude oil prices rose today as supply is expected to remain tight amid restrained output by major producers with global demand unperturbed by the spread of the Omicron variant of COVID-19.
Brent crude oil futures for March jumped 1.65% from Friday to $87.48 per bbl at the end of Indian market hours. Typically, a rise in crude oil prices increases upside risks to inflation in India and provides less room for the Reserve Bank of India to prolong its monetary policy accommodation.
Meanwhile, the yield on the 10-year US Treasury note rose 4 basis points from Friday's close to 1.82% by the close of Indian market hours. US financial markets were closed on Monday on account of Martin Luther King Jr Day.
Some traders had paid higher fixed rates in the domestic market on Monday on the view that the 10-year US Treasury yield would top 1.80%, and others stepped up their bets to push the five-year swap rate higher after it broke the psychologically-important level, dealers said.
"Once the interest rate view was solidified, there was no looking back in the five-year swap (rate), which may see receiving coming in only at 5.75% now," a dealer at a primary dealership said.
On the domestic front, with the overnight rate close to the reverse repo rate of 3.35%, traders paid fixed rates in short-term OIS rates on the view that the RBI will hike the policy repo rate thrice during the calendar year, dealers said.
These quarter-percentage-point repo rate hikes would likely drive up the Mumbai Interbank Overnight Rate, the fixed leg of the swap, 75 bps over the tenure of the one-year swap rate, the most traded OIS rate today among contracts under two years, dealers said.
The central bank may step up its liquidity measures to push overnight rates higher along with a hike in the reverse repo rate by 40 bps at its monetary policy meeting in February, which led traders to pay 4-6 bps higher fixed rates in swaps maturing between three and nine months.
Over the past week, short-term rates had eased slightly as the RBI had refrained from announcing two fine-tuning operations for mopping up liquidity, which it had been conducting since December.
"I don't agree with it, but the more that the US Fed's rate movements come into focus, the more the domestic market pays saying that the RBI will hike repo rates thrice consecutively starting with the April policy review," a dealer at a foreign bank said.
"Combined with the expected 40-bps reversal in February, this is the upper band of where the one-year swap can be," the dealer said.
Typically, the reverse repo rate is only 25 bps below the repo rate. However, the RBI has kept the reverse repo rate 65 bps below the repo rate of 4% as an emergency measure to soften measure during the COVID-19 pandemic.
OUTLOOK
Swap rates are seen steady on Wednesday 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%.
| At 1530 IST | MONDAY |
1-year OIS | 4.44% | 4.38% |
2-year OIS | 5.00% | 4.92% |
5-year OIS | 5.69% | 5.63% |
2-year MIFOR | 5.41-5.55% | 5.35-5.49% |
5-year MIFOR | 5.89-6.03% | 5.84-5.98% |
End
US$1 = 74.57 rupees
Edited by Avishek Dutta
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