Negative yield quoted for first time on Indian bond thanks to error

A negative yield was quoted for the first time on India’s sovereign bond trading platform on Friday after a bank placed a wrong price, according to people with knowledge of the matter.

The 6.17 per cent note maturing in 2021 was offered at a negative yield of around 1.5 per cent, according to traders who saw the quote on the Clearing Corporation of India’s Negotiated Dealing System — Order Matching, or NDS-OM platform. They asked not to be identified as they aren’t authorised to speak to the media.

A bank placed a wrong price quote, which led to a negative yield as the paper was nearing maturity, according to people who asked not to be identified as the details aren’t public.

The Clearing Corporation later on Friday emailed traders to say that there was no change on its end to the way the system operates on inputting prices and the calculation of yields. While there’s more than $13.4 trillion of negative-yielding debt in the world, the phenomenon had been unheard of in an emerging market like India where the benchmark 10-year note trades at above 6 per cent. Traders speculated that the system was manually over-ridden, which caused a negative yield quote. Banks and financial institutions typically have internal risk management systems that prevent occurrences like negative yields caused by manual errors. 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 SBI last month exhorted the Reserve Bank of India to make short-selling costlier.

Traders who wish to short Indian bonds need to use the CROMS platform to borrow the paper from banks against a short-tenor loan that pays the short-sellers as low as 0.01 per cent 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.

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