Banks and financial institutions typically have internal risk management systems that prevent occurrences like negative yields caused by manual errors. Traders therefore speculated that the system was manually overriden, which caused a negative yield quote.
The Clearing Corporation later in the day emailed traders to clarify that there was no change on its end to the way the system operates on inputting prices and the calculation of yields. Bloomberg News
has seen a copy of the email. A bank placed a wrong price quote, which led to a negative yield as the paper was nearing maturity, according to people with knowledge of the matter, who asked not to be identified as the details aren’t public.
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.
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. An economist at State Bank of India -- the nation’s largest bank that is also among the biggest holders of these notes -- last month 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.
An email to CCIL on Saturday wasn’t immediately answered. An email to an RBI representative outside of business hours Friday wasn’t immediately answered.
The bond that was offered at a negative yield of around 1.5% closed trading at 3.57% on Friday.
(With assistance from Anirban Nag.)