A negative yield was traded for the first time on India’s sovereign bond trading platform on Friday, traders said, prompting intense speculation about why.
The 6.17% bond due 2021 was offered with a negative return of around 1.5%, according to traders who saw the listing on the Clearing Corporation of India – Order Matching traded trading system, or NDS platform. -OM. They asked not to be identified because they are not authorized to speak to the media.
While there is a total of $ 13.30 trillion of negative-yielding assets in the world, the phenomenon has not been heard in an emerging market like India, where the benchmark 10-year bond is trading above 6%.
Banks and financial institutions often have internal risk management systems that prevent events such as negative returns caused by manual errors. Therefore, traders speculated that the system was manually overridden, causing a negative performance quote.
Later, the Compensation Corporation sent an email to the traders to clarify that there were no changes in the way the system operates when entering prices and calculating returns. Bloomberg News has seen a copy of the email. A bank placed an incorrect price quote, which generated a negative return as the paper was nearing its expiration, according to people with knowledge of the matter, who asked not to be identified as the details are not public.
The point of concern for traders was that if negative rates start showing up on the Clearcorp Repo Order Matching System, or CROMS platform, it could make it more expensive to short Indian bonds.
The strategy, in which traders bet on an asset and borrow it to hedge their bets, has been increasingly used in India after a record government loan scheme led to a paper glut. An economist at the State Bank of India, the country’s largest bank that is also among the largest holders of these notes, last month urged the Reserve Bank of India to make short selling more expensive.
Currently, traders who want to sell Indian bonds short must use the CROMS platform to borrow the paper from banks against a short-term loan that pays them as little as 0.01% at times of high demand.
If the rate falls into negative territory, it would be more costly for traders to borrow bonds, effectively imposing a penalty on short sellers.
An email sent to CCIL on Saturday was not immediately returned. An email sent to an RBI representative outside of business hours on Friday was not immediately returned.
The bond that was offered with a negative yield of around 1.5% closed trading at 3.57% on Friday.
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