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You Can Trade 91-day T-Bills Soon


Every regulatory body in the Indian market woke up recently and decided to allow Interest rate futures on treasury bills. SEBI said ok, and RBI said ok.

What does this mean? The Indian government keeps borrowing short term money as "Treasury-Bills". The 91-day T-bill sold on 09 Mar 2011 was at 98.25, where the yield was an annualized 7.1443%. The T-Bill is bought at a discount (say 98.5 or something) and on maturity (91 days later) you get the full Rs. 100. The difference is the interest you expect, and it’s multiplied by 4 to get an annual yield.

The idea now is to buy (or sell) a futures contract that trades on the "yield" piece – that is, you trade on the direction of this yield. But it’s a little complex: What you’ll see on the screen is something like 95 (which indicates a 5% yield – the distance from 100 being the yield).

Each contract is for 2000 bills, cash-settled. Let me construct an example – this is how I imagine it working:

1. You buy a contract – 2000 lot size at 95 (5% implied yield)

2. Since it’s a 91 day t-bill, you get only 1/4th the interest for the year. So your contract value is actually (100- yield/4), and since yield = 5%, you will end up with a per-t-bill contract value of Rs. 98.75. The lot size is 2000, so your contract value is 1,97,500.

3. Effectively each basis point move (that is, a move from 5% to 5.01%) will increase or decrease your profit by Rs. 5. Remember when you bet  on yields, the buyer of the contract LOSES if the yield goes up. Yields are inversely proportional to prices.

4. Margins are approximately 0.1% of contract – about Rs. 200 or so. I would expect to see them charge about Rs. 500 anyhow.

5. On expiry day (last wednesday of the month), the future expires. There’s daily mark to market with the closing price of the futures yield , so if yield jumps from 5 ->5.05%->5.1%->4.9%, you will end up having mark-to-market of 0, – 25, -25, +100 respectively.

6. There’s daily volatility calculations that will impact the margin.

There is no "interest" and all that – you’re just hoping the yield will go up or down (if you’re selling or buying, respectively).

At least this is what I think. Let’s see how it actually turns out.

Overall, the concept is good and since it’s cash settled, there’s no worry of "delivery" of such securities. (the 10 year interest rate future is settled by giving securities).

But remember, you’re not buying a 91-day t-bill. You’re betting on the direction of the yield. You could take a calendar spread – buy one month, sell the next, where you pay a very small margin (only Rs. 100 for a one month spread) and perhaps net out the difference. You can’t hold the future for 91 days (even if you buy a 3-month future) and lock in some interest – there is no interest to be paid, and at the end of 3 months, you’ll only get the price according to the yield on the last t-bill sale *then*.

FIIs have limits on what they can buy in debt in the country in general, so they’ll find it difficult to participate here.

Interest rate futures have been a disaster till now on the NSE, so let’s see how the 91-day t-bill futures go.


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