Bond market throws up arbitrage opportunity
Investors could well find an arbitrage opportunity in the bond market where yield curves have become rather unusual for two sets of long-term papers. Yields on the nine-year paper are at least 16 basis points higher than on the benchmark 10-year bonds.
The difference has been in the range of 15-25 basis points in the past three-four weeks as the new benchmark paper stock yields below the old sovereign papers with residual nine-year maturity.
“If the traders believe that the spread is likely to increase, they could sell the old benchmark in the futures market and buy the new bond in the spot market,” said Sandeep Bagla, associate director at Trust Capital. “As the issuance of the new bond increases over time, the spread can be expected to narrow.”
The Interest Rate Futures is a derivate market where investors mostly cover their interest rate risk.
“This is not to be confused with yield curve inversion,” Bagla said.
Yield curve inversion takes place when short end rates, typically one-year rates, trade higher than the five- or 10-year rates, dealers said.
A protracted inversion is taken as a probable sign of impending slowdown in future economic activity, according to Bagla.
Bonds with nine-year maturity have an outstanding stock of Rs 1.13 lakh crore compared with Rs 20,000 crore worth of issuance in the new benchmark series, show data from the Reserve Bank of India.
“Many banks are holding the old series and unable to further buy in the hold-to-maturity category as the limit of single securities is reached,” said Devendra Dash, head – asset liability management, AU Small Finance Bank. “Hence, the yield gap is around 15-20 basis points.”