Most-traded bonds vanish from repo market as banks hoard them

Banks in India are the biggest holders of sovereign bonds


Banks looking forward to maximising treasury gains before closing books for the year ending 31 March refuse to part with the sovereign bonds. Photo: Reuters
Banks looking forward to maximising treasury gains before closing books for the year ending 31 March refuse to part with the sovereign bonds. Photo: Reuters

Mumbai: The most-traded bonds in India have virtually become unavailable in the repurchase market as banks looking to maximize treasury gains before closing books for the year ending 31 March 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.”

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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 Rs38,200 crore for the year ending March 31, up from Rs23,600 crore 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. Bloomberg

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