"When everyone is against you, it means that you are absolutely wrong-- or absolutely right." - Albert Guinon
The recent RBI's hike has taken atleast some by surprise since the prior indications were that the we would be on hold till April. May be RBI like all of us, is slowly giving up on double dip theories and coming around to the view that rate hikes are inevitable.
The fact that RBI was somewhat behind the curve is demonstrated by the bull flattening that followed. Overall, this could be a welcome measure for the markets as this could be taken as an indicator towards steady hikes rather than a sharp upmove.
The recent RBI's hike has taken atleast some by surprise since the prior indications were that the we would be on hold till April. May be RBI like all of us, is slowly giving up on double dip theories and coming around to the view that rate hikes are inevitable.
The fact that RBI was somewhat behind the curve is demonstrated by the bull flattening that followed. Overall, this could be a welcome measure for the markets as this could be taken as an indicator towards steady hikes rather than a sharp upmove.
In any case there is no disagreement on the need for normalising the policy rates. A normalised a repo corridor could be say 5-6%. As of now, the consensus seems to be that we will get there by year end.
What I find disturbing is that everyone is convinced that with the hardening of policy rates the market yields also will harden. That the 10 yr G-sec will get to 8.50 is a foregone conclusion. Rarely we see this kind of 100% RSI. Why then is not the market already at 8.50. March end accounting logic? Or awaiting the negative trigger of borrowing program for next year? Or is this the time to bet the other way?
Is there is any argument left for yields to soften? Lets look at the implied forward rates in Overnight Index Swap (OIS) & G-sec curves
Implied Implied
Forward OIS Forward G-sec
mths mths
6*12 5.48 12*24 6.88
12*18 6.26 24*36 7.93
18*24 6.80 36*48 8.55
24*30 7.13 48*60 8.92
30*36 7.61 60*72 9.13
36*42 7.71 72*84 9.25
42*48 8.03 84*96 9.32
48*54 8.37 96*108 9.36
54*60 8.66 108*120 9.38
So, given the current market rates, the six monthly OIS & 1yr G-sec are expected to be as above at the end of each forward 6 &12 monthly periods. Are these high enough to warrant some more flattening? Well at the peak of interest rates in 2008, we had seen these forwards crossing 11%. Would it then make sense to wait for initiation of longs?
In any case the interest rates this round are critically dependent on asset prices and perhaps not so much on inflation (since inflation seems to be on a predictable path it is perhaps already discounted in the rates).
Going by the extent of consensus on higher yields, the contrarian logic to go long is definitely tempting. A range of 8-8.25 seems to be a good entry for longs. We may atleast get a small rally to shake off the weak bears and to re-enlist the beaten down perma-bulls. For a stronger rally, though we would need renewed talk of double-dip
What I find disturbing is that everyone is convinced that with the hardening of policy rates the market yields also will harden. That the 10 yr G-sec will get to 8.50 is a foregone conclusion. Rarely we see this kind of 100% RSI. Why then is not the market already at 8.50. March end accounting logic? Or awaiting the negative trigger of borrowing program for next year? Or is this the time to bet the other way?
Is there is any argument left for yields to soften? Lets look at the implied forward rates in Overnight Index Swap (OIS) & G-sec curves
Implied Implied
Forward OIS Forward G-sec
mths mths
6*12 5.48 12*24 6.88
12*18 6.26 24*36 7.93
18*24 6.80 36*48 8.55
24*30 7.13 48*60 8.92
30*36 7.61 60*72 9.13
36*42 7.71 72*84 9.25
42*48 8.03 84*96 9.32
48*54 8.37 96*108 9.36
54*60 8.66 108*120 9.38
So, given the current market rates, the six monthly OIS & 1yr G-sec are expected to be as above at the end of each forward 6 &12 monthly periods. Are these high enough to warrant some more flattening? Well at the peak of interest rates in 2008, we had seen these forwards crossing 11%. Would it then make sense to wait for initiation of longs?
In any case the interest rates this round are critically dependent on asset prices and perhaps not so much on inflation (since inflation seems to be on a predictable path it is perhaps already discounted in the rates).
Going by the extent of consensus on higher yields, the contrarian logic to go long is definitely tempting. A range of 8-8.25 seems to be a good entry for longs. We may atleast get a small rally to shake off the weak bears and to re-enlist the beaten down perma-bulls. For a stronger rally, though we would need renewed talk of double-dip
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