India IRS Review: Up as US yields surge on Fed rate hike view

India IRS Review: Up as US yields surge on Fed rate hike view

Informist, Tuesday, Nov 16, 2021


By Aaryan Khanna


NEW DELHI – Overnight indexed swap rates ended higher, tracking an overnight surge in US Treasury yields, prompting traders to pay fixed rates on the view that the US Federal Reserve could hike rates earlier than expected.


The one-year rate ended at 4.36%, against 4.33% on Monday, while the five-year swap rate ended at 5.52%, compared with 5.48% at the previous close.


US Treasury yields continued their climb on Monday after consumer inflation hit a near 31-year high in October, as per data released last week. Elevated core inflation was a concern for global investors as well.


Some investors placed bets anticipating quicker-than-expected rate hikes by the Federal Reserve after the CPI print, with some tenures of US yields approaching 52-week highs. The yield on the 10-year Treasury note rose 5 basis points to 1.63% on Monday.


The elevated levels of inflation stoked fears that the US central bank could look to unwind its asset purchase programme at a brisk pace and eventually hike interest rates to curb inflation, dealers said.


"I don't think the inflation situation in the US is comfortable right now for the Fed despite its assurances, so if it stays elevated then all the soft taper guidance in the recent (November) policy could change very quickly," a dealer at a primary dealership said.


However, traders were wary of paying substantially higher OIS rates on the view that domestic monetary policy accommodation was unlikely to unwind faster than expected after a benign inflation outlook in the near term, dealers said.


The CPI inflation print for October was within the Reserve Bank of India's 2-6% comfort band, despite India's crude basket remaining above the $80-per-bbl mark for much of the month. The government's slashing of excise duty on fuels earlier this month was also seen moderating price pressures in the near term.


OIS rates have priced in a 15-20 bps reverse repo rate hike in December, dealers said. However, the RBI may hold off on a hike to its February policy review, especially as central bank officials have committed to a gradual withdrawal of pandemic-era measures, dealers said.


"OIS rates up to two years should remain protected and not reach the recent highs, since the domestic inflation outlook is pretty solid and the RBI may not raise reverse repo (rate) even in December if it doesn't want to," a dealer at a private bank said.



On Wednesday, swap rates are likely to open steady as traders may stay on the sidelines after the recent volatility witnessed in swap rates.


Any sharp movement in US Treasury yields and crude oil prices might also lend cues at open.


The swap rate in the one-year segment is seen at 4.20-4.45%, and that in the five-year at 5.40-5.65%.



At 1530 IST


1-year OIS



2-year OIS



5-year OIS



2-year MIFOR



5-year MIFOR






Edited by Avishek Dutta


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