The five-year swap rate jumped to 6.81%, the highest since Nov. 9, 2022, while the one-year swap rate inched higher to 7.08%, the highest since March 9.
"Paying from large offshore players has led to stop losses being triggered for local participants, leading to an exaggerated move in swaps," a trader with a private bank said, requesting anonymity as he is not authorised to speak to media.
U.S. yields have remained elevated for the past few days, with the 10-year yield hovering around 4.30%, marginally shy of its 16-year high.
In August, the yield hit 4.3660%, its highest since November 2007, and many market participants expect this level to be breached, which could open the door to test 4.50%, traders said.
Meanwhile, oil prices also remain higher, with the benchmark Brent crude contract staying above the critical $90-per-barrel mark amid supply worries.
"The market is expecting the 10-year U.S. yield to breach fresh highs and hence, there is caution, which is leading paying, while locally, there is no major receiving interest," said Vijay Sharma, senior executive vice president at PNB Gilts.
Traders await the all-important U.S. inflation data, due after Indian markets close on Wednesday, for further cues on swap rates. That will be followed by the Federal Reserve's policy decision on Sept. 20.
Even though traders do not anticipate a rate hike next week, the odds of one in November are around 50%.
Active foreign players are shifting to swaps, which has pushed up the volume is these interest rate derivatives, a treasury head of a foreign bank said.
(Reporting by Dharamraj Dhutia; Editing by Janane Venkatraman and Savio D'Souza)
By Dharamraj Dhutia
