Market jitters in an event-heavy week lead to spike in bond shorts
traders expect bonds to rally now due to mounting inflation concerns in the aftermath of the rain fury at home, and low confidence on the likely outcome of the Federal Reserve's decision on US interest rates later this month. 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
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