Multi-year high swap rates are prompting some Indian debt fund managers to engage in trades aimed at enhancing fixed-income returns. Notable companies, such as Aditya Birla Sun Life Asset Management Co. and DSP Asset Managers Pvt., are investing in floating-rate corporate bonds and employing overnight index swaps to convert these into synthetic fixed-rate investments, thereby locking in elevated interest rates.
Since the onset of the US-Iran conflict in late February, swap rates have escalated. Traders anticipate that an inflation surge driven by oil prices will induce tighter monetary policies, with the three-year overnight index swap (OIS) recently reaching its highest level since 2023. Markets have priced in 125 basis points of potential rate hikes over the forthcoming year, as per MUFG Bank Ltd., whose base case predicts only 50 basis points of increases.
Sunaina daCunha, co-chief investment officer for debt at Aditya Birla Sun Life, stated, “The OIS market is factoring in a lot of rate hikes, and that has led to corporate bond-swap trades rising.” She noted that investors can earn 75 to 100 basis points more than typical bond yields by entering swap agreements linked to floating-rate corporate bonds.
The mechanism behind this trade involves purchasing floating-rate bonds, which generally offer interest based on a three-month Treasury bill rate plus a credit spread. Subsequently, an overnight index swap is utilized to convert the floating payments into fixed payments.
A notable increase in floating-rate bond issuances has occurred, as expectations of rising global interest rates render fixed-rate debt less appealing. Investors are shifting towards securities with coupons that reset periodically in accordance with market rates.
Since mid-May, at least five issuers have raised ₹6,400 crore through floating-rate notes. On Monday, two more issuers—Cholamandalam Investment and Finance Co. and Muthoot Finance Ltd.—are expected to seek bids for up to ₹100 billion. Cholamandalam alone aims to raise ₹5,000 crore, potentially marking the largest floating-rate bond issuance by a local lender.
Suyash Choudhary, chief investment officer for debt at Bandhan AMC Ltd., remarked, “From the issuer standpoint, they are getting volumes in what is otherwise a challenging market.” Additionally, lenders like Cholamandalam and Muthoot typically receive floating-rate income from loans and assets, so issuing floating-rate liabilities helps to align their balance sheets, according to DSP Asset fund manager Shantanu Godambe.
Most recently issued floating-rate bonds by shadow lenders have been three-year notes, which align with the maturity segment where swap rates have experienced the most significant increases.
Further stories on these developments are available at bloomberg.com.
Published on May 25, 2026.
