NSE Introduced Interest Rate Future (again) yesterday, and this time there seems to be some early interest from players. More than 3,000 cr. was traded yesterday and till 11 AM more than than 25,000 contracts have already been traded, which is about 500 cr. of volume.
The contract is:
- 2000 interest futures per contract, face value of Rs. 100
- the 8.83% (Nov 2023) and the 7.16% (May 2023) are the underlyings that exist.
- You get one month, two month and three month futures.
- Margins are 3% of price, which is about Rs. 6,000 to 7,000 per contract.
- Daily mark to market, against the futures price itself (last 30 min average).
- Timings: 9 AM to 5 PM (like the underlying bond market)
- Expiry: Last Thursday of the month against the NDS-OM price. (Clean price only, I think)
Is it attractive?
On average, bonds don’t move much. Today the price is down about 0.64% from yesterday. Which means yields are up.
The price change of 0.65 per bond is effectively about Rs. 1300 per contract (2000 bonds). For a margin of Rs. 7,000 that’s nearly 20% as a move (short players would have made money, long players would lose).
The yield difference between a price of 101.8 yesterday (yield: 8.55%) and 101.22 today (yield: 8.64%) is just 9 basis points, so it’s not a huge yield change. Yields can move 20 basis points either ways, and sometimes much sharper moves have been noted. The security itself has a 3% price band in either direction with another 1% leeway - but if there is a sharp move, I hope they’ll relax this band.
Current yields are at 8.67% in NDS (last traded price is 101) so the immediate direction is down. There is an RBI policy out on the 28th, which can make this security really volatile. If they drop rates, this bond could rally. Given the huge leverage (30x) it is definitely something to trade with caution.
Given the current fiscal situation, where the government might raise a lot of money through dividends (like Coal India), shady stake sales (like IOC) and proper disinvestment (like HIndustan Zinc), the issuance of more bonds looks unlikely. Without fresh supply the downward pressure on these bonds will be low.
However prices of bonds have rallied substantially in this month, and it wouldn’t be surprising to see news take yields higher (and prices lower). Negative news might be a populist policy (like increasing the oil subsidy), a market borrowing change (like swapping soon-to-expire bonds for longer term ones) or just that FIIs aren’t running madly after Indian debt like they have in January.
I would however resist from trading this security until there is proper price knowledge and we have one settlement run through to figure out how prices move. At any rate, the direction for the 8.83% security, in my opinion, is down, in April when there is likely to be a new 10 year security issued and the 2023 bond will go off the run. So it may be more useful to trade the April future short when it begins trading on Jan 31.