Initial volumes show acceptance of 91-day T-bill contracts

Ashish Rukhaiyar
Mumbai, 19 July 2011

From the initial volume in exchange-traded derivative contracts on 91-day treasury bills, industry seems to have accepted the new instrument. It has been two weeks since these were launched and the average daily turnover has been Rs 270 crore.

According to industry participants, the new instrument is being primarily used by entities wishing to hedge interest rate exposure and by arbitragers looking to make some gains based on the yield curve spread. Interest rate futures, as the name suggests, are derivative contracts with government bonds as the underlying product. Depending on one’s view on the interest rate movement, an entity can go short or long to hedge against volatility.

On July 4, when futures on 91-day T-bills were launched, the National Stock Exchange reported a volume of Rs 731.2 crore, with nearly 40,000 contracts traded. The volume nearly halved on the following days. It touched a low of Rs 63.35 crore on day, after staying over Rs 200 crore on most days last week. The average, however, has been Rs 272 crore (see table).

“Those who want to hedge their interest rate exposure will be attracted to this segment, which will also help in creating a transparent yield curve,” says J Moses Harding, executive vice president & head (global market), IndusInd Bank. “It will provide good support when the yields are going down and resistance when the yields are on the rise. Arbitragers will also be active when the yield spreads between (exchange-traded) the futures and OTC (over the counter) market is wide.”

A section of market players attributes the initial success to the product design, that incorporates a cash-settlement feature. This is in sharp contrast to futures on 10-year government bonds, that are settled with delivery of government securities with a tenor between nine and 12 years. Derivative contracts on the 10-year paper was launched in 2009 but has hardly witnessed any volume, as the entities are concerned about dumping of illiquid bonds.

Corporate houses which deal in floating rate bonds are expected to use this instrument to hedge against interest rate volatility. Even the mutual fund industry, which has a lot of debt funds, can use futures on the 91-day T-bill for hedging.

Banks, however, are expected to be the biggest user, as they invest significantly in T-bills as part of their treasury operations. Banks can go short on the contracts if they feel rates would move northwards.