China bond sell-off makes case for options market

Current hedging tools inadequate, but regulators reluctant to liberalise derivatives markets

China’s recent bond market sell-off, which sent sovereign yields to a three-year high in November, could pressure the world’s second-largest economy to develop an interest rate options market, allowing investors to hedge their exposure, according to market participants.

With existing interest rate swaps exposing bond investors to basis risk, the creation of an options market would allow participants to express two-way views on the direction of yields more easily, thereby reducing the risk of