MUMBAI, Sept 12 (Askume) – Indian investors should be more inclined to bet on overnight index swaps rather than establish new long bond positions as the global interest rate cutting cycle has begun, a senior BNP Paribas official said.
Globally, interest rates remain high as many countries prioritise inflation management. However, they are now on the verge of an easing cycle.
The chance of the Fed cutting interest rates at next week’s meeting is virtually zero.
“As we have seen historically, there has been an uptick in policy rate cutting cycles and Indian rupee swaps into better-performing bonds,” Chandresh Jain, Asia rates and FX strategist at BNP Paribas Global Markets, told Askume on Thursday.
“Also, there is already a shortage of bonds in the market, so bonds will underperform during a bull market,” he added.
India’s five-year OIS interest rate is around 5.98%, while the 10-year benchmark 2034 government bond yield is 7.10%, up from 6.82%, a difference of over 80 basis points.
Five-year OIS rates have declined by more than 40 basis points since the beginning of the quarter, while 10-year bond yields have fallen by 18 basis points in the same period.
Jain expects bond yields and swap rates to fall further, however, spreads are expected to widen and could reach 90-95 basis points over the next three months;
The market currently expects the Fed to cut interest rates by a total of 175 basis points over the next six months, but Jain expects the Fed to cut rates by 25 basis points each five times before March.
He expects the Reserve Bank of India to cut rates by just 50 basis points over the same period. He said that while he found it attractive to acquire the Indian OIS outright, he recommended waiting for a “better entry level.”
