The Carry Trade is Getting Ready to Roar

The fundamental desirability of fixed income over alternative investments is attractive yield and how that impacts its generalization, carry. Fixed income in Q2 2015 has not been so desirable. These sorts of dissappointments make money reach for yield.

I don't think this is so crazy at this point. I think the value is in the carry trade and risk compensation that pays you is FX risk. After having NOT completely imploded in the face of commodity price collapses and Fed tightening, I expect the carry trade in EM debt to roar back to life this year.

So I’m looking for value. And I think there is serious value in India. Have a look.

The 10Y sovereign is the anchor of Indian debt markets. The next layer is provincial debt, giving you about 25bps in pick-up and corporate debt gives you close to 80 bps. Note that maturities aren’t matched here: the market is too thin for that. You have to take what is out there.

Indian LCD debt.jpg

Also note also that this is local currency debt—and this is really where the value lies. Look at corporate spreads on local currency bonds over USD bonds. Discounting differences in Indian firms that issue USD debt versus LCD debt, there is a 600 bps currency risk premium in local currency. While I’ll need to drill in a bit, this is looking pretty juicy. Especially given that you can hedge the FX piece.

Indian LCD USD spreads.jpg


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