Market jitters in an event-heavy week lead to spike in bond shorts

Higher bond yields could push up broader borrowing costs since these are used as pegs to price debt by companies, too.

The special segment of the Clearing Corporation of India’s ClearCorp Repo Order-Matching System has shown an unusually large volume of transactions in the 10-year benchmark bond over the past couple of days, treasury executives said.

Such a phenomenon typically reflects a build-up of short positions, which are trading calls taken on expectations of a rise in yields – or a fall in prices. The 10-year benchmark bond is the most liquid security in the market.

Bond prices and yields move inversely.

“There are many crucial events this week. These include the domestic and US inflation data and then the all-important Federal Reserve rate decision later this month,” said Vikas Goel, MD and CEO, PNB Gilts.

A sharp rise in prices of some vegetables such as tomatoes has led to concerns over hardening domestic inflation, which might leave the central bank with little elbow room on rates. Flooding across vast swathes of north India, and rain deficit in certain other parts of the country could cause farm-gate prices of agricultural output to remain sticky, potentially causing consumer inflation to remain elevated.On Wednesday, yield on the 10-year bond closed three basis points higher at 7.12%. Traders see the yield in a band of 7.05-7.20% in coming days.

“Traders have either squared off positions or they are short. It is very difficult to go long in this environment. The signals from the Fed have been complex – earlier this month they were hawkish about more rate hikes but now they seem a little less so. It all boils down to what they say at the policy meeting,” Goel said.

The US Federal Reserve has raised interest rates by 500 basis points since March 2022. The higher rates have pushed up US bond yields sharply, reducing the appeal of fixed-income assets in emerging markets for global investors.

Unusual Volumes
On Wednesday, the volumes in the special repo segment for the 10-year benchmark bond were at ₹13,451 crore as against ₹15,086 crore on Tuesday. Generally, volumes for a single security in the special repo segment do not exceed the ₹10,000 crore mark, traders said, with some saying that the turnover over the past couple of days was among the highest ever seen.