Introductory Context
"Exploits structural spread mispricings between physical Government of India benchmark bonds and interbank MIBOR Overnight Indexed Swaps (OIS)."
Cash G-Sec vs Synthetic OIS: The Swap Spread Anomaly
In Indian fixed income markets, the Swap Spread represents the yield difference between a fixed-rate interbank swap (MIBOR Overnight Indexed Swap - OIS) and a risk-free Government of India (G-Sec) bond of identical maturity:
Under frictionless markets, swap spreads reflect systemic banking credit risk and sovereign supply dynamics. When government debt issuance surges (heavy weekly borrowing auctions), G-Sec yields rise while OIS rates remain anchored to RBI monetary policy, causing swap spreads to tighten or turn negative. Quantitative desks harvest mean-reverting mispricings by pairing cash G-Secs with OIS contracts.
• The Swap Spread Arbitrage Rule in One Sentence
Track the 5-year MIBOR OIS minus 5-year G-Sec swap spread; when the spread narrows below its 1-year historical band (< -1.8σ), execute a Pay Fixed OIS + Buy G-Sec spread trade, capturing spread expansion as sovereign supply is absorbed.
Execution Architecture in India (CCIL & NDS-OM)
The trade package combines an exchange-cleared OTC derivative with a physical sovereign bond:
Buy 5-Year GoI Benchmark bond on RBI NDS-OM; fund the position via overnight CCIL TREPS (Tri-Party Repo) at the prevailing overnight money market rate (~6.50% - 6.65%).
Enter a 5-Year MIBOR Overnight Indexed Swap paying fixed coupon and receiving daily compounding MIBOR (floating overnight rate).
- Net Floating Cashflow: The floating MIBOR received on the swap perfectly offsets the overnight repo financing cost paid on the bond.
- Net Fixed Cashflow: The desk locks in the net spread: G-Sec Yield - OIS Fixed Rate. As swap spreads normalize toward historical equilibrium, the desk unwinds both legs at a substantial capital gain.