India witnesses its first negative-yield bond quote

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  India witnesses its first negative-yield bond quote

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• CCI's NDS-OM sees first negative: A negative yield was quoted for the first time ever on India’s sovereign bond trading platform on 09-March, 2021. That led to speculation about its motive. The 6.17% bond maturing in 2021 was offered at a negative yield of around 1.5%, as per traders who saw the quote on the Clearing Corporation of India’s Negotiated Dealing System -- Order Matching, or NDS-OM platform. (the fact wasn't disclsed by authorities)
• India versus the World: There’s a total $13.30 trillion of negative-yielding assets in the world today, but not in India. Here, the benchmark 10-year note (G-Sec) trades at above 6%. Banks and FIs (financial institutions) typically have internal risk management systems that prevent occurrences like negative yields caused by manual errors. So this may be a manually overriden quote.
• Internal clarification: The Clearing Corporation later clarified (only to traders) that a bank placed a wrong price quote, which led to a negative yield as the paper was nearing maturity. The point of concern for traders was that if negative rates begin to show up in the Clearcorp Repo Order Matching System, or CROMS platform, it could make it costlier to short Indian bonds.
• Shorting Indian bonds: The strategy - where traders bet against an asset and borrow it to cover their bets - has been increasingly used in India after a record government borrowing plan caused a glut of paper. State Bank of India, which is India's largest bank and among the biggest holders of these notes, had recently exhorted the Reserve Bank of India to make short-selling costlier. Currently, traders who wish to short Indian bonds need to use the CROMS platform to borrow the paper from banks against a short-tenor loan paying them as low as 0.01% at times of high demand. If the rate dips into negative territory, it would become costlier for traders to borrow bonds, effectively imposing a penalty on short-sellers.
• Knowledge centre:

1. Negative bond yields - A negative bond yield is when an investor receives less money at the bond's maturity than the original purchase price for the bond. A negative bond yield is an unusual situation in which issuers of debt are paid to borrow.
2. Indian government G-Sec - A Government Security (G-Sec) is a tradeable instrument issued by the Central Government or the State Governments. It acknowledges the Government’s debt obligation. Such securities are short term (usually called treasury bills, with original maturities of less than one year) or long term (usually called Government bonds or dated securities with original maturity of one year or more). In India, the Central Government issues both, treasury bills and bonds or dated securities while the State Governments issue only bonds or dated securities, which are called the State Development Loans (SDLs). G-Secs carry practically no risk of default and, hence, are called risk-free gilt-edged instruments.

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