Swaps rise most in 3 wks, bonds stay range-bound

Overnight indexed swaps posted the biggest rise in nearly three weeks on Monday as traders reduced their positions on concerns over tight liquidity and talk of a possible interest rate increase in November. A large pay order by a European bank added to the sharp rise in swaps, dealers said.

But bonds ended nearly steady as traders preferred to stay on the sidelines ahead of the central bank’s November 2 monetary policy. “There was a bigticket trade by a counterparty, which impacted the swaps where there are a lesser number of players than in bonds,” said Manish Wadhawan, director and head of rates at HSBC Bank in Mumbai. The benchmark 10-year bond yield ended at 8.14%, steady from its close on Friday, after rising to 8.16% early. It was the third-most traded bond and moved in the 8.12-8 .16% band. The bond is less liquid now on concerns that it may not be issued due to this high outstanding. The 12-year bond, which is second-most liquid paper, 8.13% 2022 ended up one basis point at 8.11%. Volume traded was a low Rs 4,385 crore compared with Rs 8,960 crore on Friday.

The one-year swap ended up 6 basis points at 6.69% while the benchmark five-year swap ended up 9 basis points to 7.16%, each rising the most intra-day since October 4. The short-end swaps rose due to tight liquidity while long-end rose on rate hike worries, dealers said. The government announced a Rs 28,550-crore rupee bond buyback plan on Thursday, and the first tranche was auctioned on Monday. The government bought back Rs 2,148 crore of the targetted Rs 12,000 crore on Monday. Liquidity remained tight, adding to the bearish sentiment in the market. Banks borrowed Rs 89,960 crore from RBI’s repo auction, the highest in at least 2010.