Bonds, Rates and USDINR Update

The Yield Curve

Lets put the current zero-coupon yield curve in context.

Jan 2011 vs. Now


Jan 2012 vs. Now


Jan 2013 vs. Now


Indian 10 yrs vs. US

After the initial Modi euphoria, the spread between Indian 10 yrs and US 10 yrs started to revert back to its mean:


Total Return Indices

Investors in the long bond are yet to recover from the July 2013 draw-down but this year is looking good. Long-bond might just be the place to be as the RBI is widely expected to get into easing mode later this year/early next year.

Cumulative Returns Since 2000

short bond total return

intermediate bond total return

long bond total return

Cumulative Returns Since 2010

short bond returns since 2010

intermediate bond returns since 2010

long bond returns since 2010

Bond ≠ Boring

Returns have been volatile for bond investors.

gsec monthly returns

Can’t really sell “stability” here.


A new normal past the euphoria and the hangover?



In closing

With inflation somewhat stabilizing and the NDA-II government wanting to kick start growth, bonds are getting interesting again. And when rates start moving, currencies cannot be far behind.

Stay updated on the latest news related to Indian interest rates here. Its curated.

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


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


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


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.


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

USDINR 63.5/65 Bull Spread

We entered a USDINR 63.5/65 Bull Spread today. Basically you buy the ITM call and sell the OTM strike – cheaper than buying a call outright.

The trade has a max payoff of Rs. 955 and costs around Rs. 565 to put on. Here’s how the pay-off looks like:

USDINR bull spread payoff

The break-even is around 64 – basically the Rupee has to trade above that. But since we sold the 65 call, our returns are capped if the Rupee depreciates below 65 anytime soon. Novembers were last trading at 64.02 (+0.34)

USDINR technical chart

We had discussed a USDINR Condor before where we were betting on range-bound behavior… and it didn’t quite end well. Hopefully the setup works better this time… fingers crossed!


USDINR Long Call Condor #fail

We had posed a question last month whether a USDINR Long Call Condor made sense given decreasing volatility and range-bound behavior. We put the following USDINR October 63.00/63.50/64.00/64.50 Long Call Condor trade on:

USDINR Long Call Condor Trade

We would’ve made 4x if the Rupee traded between 63.10 and 64.40. The trade got blown out of water with the Rupee trading in a range around 61.50:


Lessons learnt:

  • The trade carries less risk (and less reward) as you approach expiry. By taking on October contracts back in September, the trade stood out far too long.
  • The Condor trade makes sense if you get the trading range near expiry right. Which we clearly didn’t.
  • On the plus side, the trade was cheap to put on, so down Rs. 100 with the possibility of +Rs. 400 if we were right was not a bad idea.

Next trade will be after mid-November…