Suits & Sayings: Long & Wrong

Big losses are rattling a major foreign bond house in India, and its top officials are feeling the heat. Its large bets on long-dated bonds, whose tenors are as high as 30, 40 and 50 years, have backfired with government security prices dropping despite aggressive rate cuts by RBI. Going by whispers wafting through dealing rooms, the mark-to-market losses stem from heavy positions in STRIPS bonds, where investors hold and trade the individual interest and principal components as separate securities. The primary dealer, an arm of one of Asia’s largest financial services groups, took a bold bet: it clung to the long papers in its trading book, hoping to rake in cash with fall in bond yields. But bond yields inched up (and prices dipped), thanks to insurance companies buying less and pension funds parking more money in equities. Since long papers have low liquidity, the total loss could be substantial unless gilt yields soften quickly post RBI's October 1 policy.


(For more on our weekly roundup of wackiest whispers and murmurs in corporate corridors & policy parlours, pick up today's edition of The Economic Times newspaper)