Category: Investing Insight

Investing insight to make you a better investor.

Rates and USDINR Update

We recently pulled up a chart of Indian 10 year rates to show how the interest rate curve went all bullish on Modi. But given the all around bullishness, we were curious as to how the 10-year rate differential between US Treasuries and Indian GSecs looked.

UST vs. GSecs

ust-ind-10yr-spread

The spread compression is nowhere near all-out bullishness and may have more room to run.

USDINR

The recent ISIS induced flight-to-safety notwithstanding, USDINR has tagged along the spread.

USDINR

Even if ISIS ends up occupying Iraq, given that their primary source of revenue is going to be oil, they might just decide to pump more of it. Our expectation is that once we get past the current knee-jerk reaction, the above trends will reassert themselves.

Related

It’s important to be politically agnostic and think about the potential market impact of the event. There are three sources of event risk that could cause the markets to swoon:

  1. Iraq
  2. Russia-Ukraine
  3. Chinese financial crisis

“My conclusion is that the so-called tail-risk are wrong and the immediate threat posed by tail-risk is lower than the market thinks.”

Source: Apocalypse Later

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The Pair Trading Tip-Sheet

During our back-testing for pair trading strategies, we found that we were most comfortable in going long the spread (when the spread is below its historical average) and betting on pairs within the same index. We have bundled all the assumptions into an easy to use pair trading “tip-sheet” that can be found here.

The pairs are computed at the end-of-day and live pair status is computed roughly once an hour. The p-value, beta and spread display both end-of-day data and live status side-by-side so that you can decide for yourself if going long the pair makes sense or not.

pair trading

It is still rough around the edges – you cannot really add a pair to your portfolio and track like you can do with option strategies. But once it is fleshed out, it will be available exclusively to your trading/demat customers.

Pair trading equity futures is not for the faint of heart. The capital at risk is bigger than what most individual investors can stomach. But when done right, the returns are commensurate with the risks.

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