Tag: US Treasuries

Global banks unwind lucrative India trades after RBI warning, BFSI News, ET BFSI

Banking & Finance

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NEW DELHI: Foreign banks have been forced to unwind billions of dollars worth of profitable currency trades at the behest of India’s central bank, according to people with knowledge of the matter.

The issue in focus is a flurry of currency swap trades that involved the banks converting rupee-denominated deposits into dollars that were then used to buy foreign sovereign debt including US Treasuries, which are unlisted in India. The Reserve Bank of India warned the banks of a regulatory breach last week, saying they must limit their holdings of such unlisted securities to no more than 10% of investments classified as the non-statutory liquidity ratio portfolio.

Some lenders had racked up exposures of more than $1 billion each by using a regulatory loophole created in February to convert rupee deposits into dollars using a buy-sell swap — buying the greenback now while selling the same amount at a specified date in the future. They then used the proceeds to purchase US government debt and profited from the arbitrage, paying around 3.5% on the local currency deposits and earning 4.9% on the 12-month yield on the currency pair.

As the biggest buyer of the greenback in the forwards market, the RBI was effectively funding some of the trading profits.

The central bank, as part of its intervention strategy, had been offsetting its dollar purchases in the spot market, by entering into sell-buy swaps in the forwards markets. That had swelled its forwards book to over long $70 billion, causing dollar/rupee forward premiums to spike and foreign banks to book arbitrage gains from the trade earlier this year.

Indian entities were net buyers of almost $3 billion worth of Treasuries over April and May, according to US government data, the first inflows from the South Asian nation since October.

The biggest beneficiaries of the swap trades have been overseas lenders in India, which have easy access to large dollar investments, the people said. An email to the RBI was unanswered.

The banks are in the process of unwinding the trade, the people said. They are selling Treasuries and conducting sell-buy swaps — selling the greenback and agreeing to buy at a later date specified in the contract.

The impact of the unwinding was visible in the forward dollar-rupee rates. The implied 12-month yields rose 7 basis points on Friday and Monday after the order and is currently trading at 4.34%.



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Dollar heads for its longest streak of weekly losses so far this year, BFSI News, ET BFSI

Personal Finance

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TOKYO: The dollar headed for its worst back-to-back weekly drop this year amid a continued retreat in Treasury yields from more-than-one-year highs as investors increasingly bought into the Federal Reserve’s insistence of continued monetary support.

The benchmark 10-year Treasury yield dipped to a one-month low of 1.528% overnight, from as high as 1.776% at the end of last month, even in the face of Thursday’s stronger-than-expected retail sales and employment data.

San Francisco Fed President Mary Daly said the same day that the U.S. economy is still far from making “substantial progress” toward the central bank’s goals of 2% inflation and full employment, the bar the Fed has set for beginning to consider reducing its support for the economy.

The dollar index, which tracks the greenback against six major peers, dipped to an almost-one-month low of 91.487 overnight before recovering somewhat to 91.678 early in the Asian session.

It’s set for a 0.6% decline for the week, extending the 0.9% slide from the previous week.

The gauge, also known as the DXY, surged with Treasury yields to an almost-five-month high at 93.439 on the final day of March, on bets that massive fiscal spending coupled with continued monetary easing will spur faster U.S. economic growth and higher inflation.

But bond and foreign-exchange markets now seem willing to give the Fed the benefit of the doubt that inflation pressure will be transitory and monetary stimulus will remain in place for years to come.

The dollar is “still struggling to find its feet in April, even though the U.S. macro outperformance narrative could not be more propitious,” Westpac strategists wrote in a research note.

“The DXY is trading like its topping out now, sooner than (we) expected.”

Retail sales increased 9.8% last month, beating economists’ expectations for a 5.9% increase, while first-time claims for unemployment benefits tumbled last week to the lowest level in more than a year, separate reports showed Thursday.

The dollar traded at 108.68 yen, heading for a 0.9% loss for the week, about the same as the previous week.

The euro changed hands at $1.1964, set for a 0.5% weekly advance, adding to the previous period’s 1.3% surge.

In cryptocurrencies, Bitcoin stood around $63,478, near the record high of $64,895 reached on Wednesday, when cryptocurrency platform Coinbase COIN.O made its debut in Nasdaq in a direct listing.

The Russian rouble tumbled on Thursday, at one point losing 2% to the dollar in volatile trade and hitting a more than five-month low versus the euro as the White House announced new sanctions targeting Russia’s sovereign debt.

U.S. President Joe Biden on Thursday authorized the move to punish Moscow for interfering in the 2020 U.S. election, allegations Russia denies.



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