India IRS Review: Surge; US yields, crude rise as US econ resilient

Informist, Friday, Jan 27, 2023


By Kasthuri Akhil


MUMBAI – Overnight indexed swap rates ended sharply higher today as traders paid fixed rates, tracking a rise in US Treasury yields and crude oil prices, dealers said.


The one-year swap rate settled at 6.72%, against 6.67% on Wednesday. The five-year swap rate ended at 6.25%, against Wednesday's close of 6.16%.

The yield on the benchmark 10-year US treasury note settled at 3.49% on Thursday, against 3.46% the previous day and further rose to 3.56% at the end of OIS market hours. US Treasury yields rose after recent data showed resilience in the US economy. 


Offshore traders persistently paid fixed rates on the view the US Federal Reserve would maintain its monetary policy stance in order to cool inflation despite slowing down its pace of rate hikes, dealers said. US GDP expanded 2.9% in the Oct-Dec quarter as against an estimate of 2.6% in a Reuters poll. US inflation data also showed improvement as personal consumption expenditure growth slowed to 2.1% on year from 2.3% in the Jul-Sep quarter.


A separate report by the US Labor Department on Thursday showed the jobs market remained strong, with initial claims for state unemployment benefits dropping 6,000 to a seasonally-adjusted 186,000 for the week ended Jan 21, lower than the 192,000 reported for the previous week.


Traders keenly eyed the monetary policy meeting of the US Federal Open Market Committee, scheduled to commence on Tuesday. According to the CME FedWatch tool, 98% of futures traders expect the rate-setting panel to hike the federal funds target range by 25 basis points, after a 50-bps hike in December.


"Apart from US yields, OIS market was also tracking crude today which rose significantly," a dealer at a primary dealership said.


The Brent crude contract for March delivery rose to $88.82 per barrel after settling about 2% higher on Thursday. Crude oil prices rose due to expectations of strengthening global demand as the world's largest oil importer, China, reopens its economy. Faster than-expected growth in the US economy in the Oct-Dec quarter also added to demand expectations. 


The five-year swap rate also rose, tracking a sharp rise in domestic gilt yields today, as fixed income traders absorbed a fresh supply of dated securities, dealers said. The yield on the 10-year benchmark gilt rose 4 bps to 7.39%, while the five-year benchmark yield rose 5 bps to 7.21%. As gilt yields rose, traders paid fixed rates to protect their underlying investments, dealers said.


"The G-sec auction was a very big negative today, there was a significant tail which was a major surprise," a dealer at a private bank said. "The paying that happened during the day was majorly because of the auction."


Back home, traders awaited the announcement of the government's borrowing programme and the fiscal number in the Union Budget on Wednesday. Traders are likely to place fresh bets in swap rates only after gauging the impact of the Budget on their underlying gilt holdings, dealers said.


Furthermore, the Reserve Bank of India's Monetary Policy Committee's meeting is scheduled for Feb 6-8, which will be crucial in deciding whether 6.50% will be the terminal rate or not, dealers said. The domestic rate view remained unchanged with swap market participants factoring in a 25-bps repo rate hike on Feb 8.


After February, policymakers are likely to opt for an extended pause as they gauge the trajectory of domestic growth and inflation, dealers maintained.



Swap rates are not traded on Saturdays. On Monday, swap rates are seen opening steady due to caution ahead of the US FOMC meet on Tuesday, dealers said.


Traders may watch out for any sharp movement in US Treasury yields and crude oil prices at open.


The swap rate in the one-year segment is seen at 6.70-6.80%, and the five-year at 6.20-6.35%.



At 1700 IST


1-year OIS


2-year OIS


5-year OIS


2-year MIFOR


5-year MIFOR





US$1 = 81.52 rupees

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT


Edited by Avishek Dutta


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