(Bloomberg) -- India's most-traded bonds have become virtually unavailable in the repurchase market as banks looking to maximize treasury gains before closing books for the year ending March 31 refuse to part with the securities.
The situation, referred to as ‘repo squeeze,' means participants running overnight naked short positions in sovereign debt using repurchase agreements are unable to borrow the bonds to finance these positions. They are instead turning to the secondary market for the securities, causing yields on two notes maturing in 2026 to slide.
“The market is faced with a very peculiar situation where some lenders are reluctant to lend securities,” said Vijay Sharma, Delhi-based executive vice president for fixed income at PNB Gilts Ltd. “This not a great practice and will lead to illiquidity in the markets.”
Some banks and primary dealers have approached the central bank to help ease the situation, people familiar with the matter said. Reserve Bank of India spokeswoman Alpana Killawala didn't immediately respond to an email seeking comment.
Banks in India are the biggest holders of sovereign debt. A December report from analysts at India Ratings & Research estimated that lenders may post treasury gains of 382 billion rupees ($5.7 billion) for the year ending March 31, up from 236 billion rupees in the previous 12 months.
Investors such as banks and primary dealers borrow and lend fixed-income securities in the repo market. Repurchase agreements, or repos, are vital because they allow traders to finance positions in the broader fixed-income market.
- Yield on the 7.59% bonds due January 2026 slips 12bps to 6.94% after sliding 4bps on Thursday
- With total traded amount of 147 billion rupees, securities are most active on RBI's NDS-OM dealing platform Friday
- Repo funding rate for the security fell to as low as at 0.01% Friday, as against the normal 5%-6% levels seen for other papers, indicating that participants are willing to lend money virtually free to borrow the note
- Yield on benchmark 6.97% debt due Sept. 2026 down 7bps to 6.76% after plunging 10bps on Thursday; securities 2nd most active on NDS-OM
- Repo funding rate dropped to 0.5% Thursday; security in shut period Friday ahead of Monday's coupon payment
--With assistance from Anirban Nag and Anto Antony
To contact the reporters on this story: Subhadip Sircar in Mumbai at ssircar3@bloomberg.net, Kartik Goyal in Mumbai at kgoyal@bloomberg.net.
To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Shikhar Balwani
Essential Business Intelligence, Sharp Market Insights, Practical Personal Finance Advice, Daily Fuel, Gold and Silver Prices and Latest Stories — On NDTV Profit.
