Ytm Or Zero Coupon Curve? What & #8217;S The Best Reference?

Best methodology, best bet

SANJIV SHAH

Executive Director, Benchmark AMC

Since the beginning of the year, debt market players have been worried about the outlook after a great run in the last two-three years. .They are worried about reduced activity and lesser opportunities in the debt markets and are exploring new vistas. The introduction of interest rate derivatives (IRDs), especially futures, is a pleasant surprise for them.

In fact, there could not have been a better time to introduce IRDs. Debt mart volumes are up, and so are derivatives volumes. Therefore, the skillset is available to introduce these products. Besides, the need for these products is well researched and documented.

 

The introduction of futures would help taking a contrarian view. The ability to take such a view facilitates incorporation of all views (bullish or bearish) in the market. This would help in reducing the unidirectionality of the market.

The ability to sell futures would help in hedging interest rate risk on long positions and improving the liquidity of the gilt markets. This will make gilts attractive and increase interest in corporate bonds as the interest rate risk on these bonds could be hedged.

Market makers in government securities (primary dealers) will be able to hedge the risk on their position by selling futures. They allow traders to create positions tailored to their forecasts of the overall level of the yields or the shape of the yield curve while limiting the risk to a desired level.

This would enhance the ability of the market makers to provide finer two-way quotes. Interest rate futures, in principle, would make the Indian debt market more active and efficient with increased participation. This would eventually help in further reducing the funding costs of the government as well as the private sector.

It would also test the skills of the participants and separate the men from boys. They would be useful not only to the existing debt market players, but to a larger canvas of people. The Securities and Exchange Board of India report on IRD says: