I have a query on what seems like a insane Arbitrage opportunity for a retail/individual investor to earn Fixed income. I want to take views and inputs on this whether I am missing something or it is a genuine arbitrage.
If someone is in India and invests say 1 million $ in US 30 year bond with yield of 5%+ currently, combined with currency depreciation, they will get nominal returns of at least 9% on the investment every year assuming 4% currency depreciation of Indian Rupees against USD.
This seems like a good opportunity and insane arbitrage to get 9% Fixed returns for next 30 years. Is there something wrong with this.
Additionally, on maturity, the principal will appreciate in INR terms as well at at least 3.5 to 4% every year over 30 years, so it might have more than doubled in INR terms over the period of 30 years.
Below are the only possible downsides i can see, along with probability of it happening
1) The USD can depreciate in INR – Impossible , if history is to go by, long term USD wins against INR by minimum 3.5 to 4% average. Structurally the country India does not have anything that can make global investors to flock to India to strengthen Indian Currency. So long term, USD appreciating vs. INR has 99.99% probability
2) The US can go bankrupt – This seems like the only downside, that US can go bankrupt and dishonor the treasury bills. Though it has not happened before, it can be a 5% possibility event over span of 30 years, but still its worth the risk.
3) Taxation, yes Tax will be paid anywhere from 30 to 39% on the bond coupon in Indian Tax system, but that tax is there on any income. So all things being equal, tax won't be a differentiator between this and other income sources.
4) Curbs on foreign investors either from US or India – This can be a unfortunate event where either of the government could curb investments in such instruments and restrict outflow from India. Might happen in future but currently no such policy
5) US currency can be replaced – This seems like the only downside, if USD no longer holds any value and is replaced by some other standard currency. I am not sure how anyone can get around this.
6) Interest rates can rise beyond current 5% – Yes, this can bring down the bond trade value, but maybe the person can reinvest the coupon received in the new higher rate bonds to partially offset any potential loss of higher interest payments.
Assuming the person investing in this is more interested in fixed income rather than growth and will not intend to sell the bond till maturity, this seems like a good opportunity.
Is there anything I am overlooking in this. Thanks for your views.
Is this genuine Arbitrage opportunity or is there something I am missing
byu/_freckles__ ininvesting
Posted by _freckles__
5 Comments
Of course, if you do your accounting in indian rupees your returns will look nice.
Look at what amazing returns a turkish person can have by doing the accounting in turkish liras!
Next step is doing your accounting in TrumpCoin.
This isn’t arbitrage. There is plenty of risk.
6. You don’t “lose” money if you hold to maturity.
US dollar has been getting stronger to the rupee lately, but you seem to be writing off the other scenario as not going to happen. This is the “arbitrage” cause you seem to think it’s guaranteed. This is the failure point in your plan.
How do you know the RUPEE is going to depreciate relative to the dollar?
this is just a carry trade without the borrowing leg. you have interest rate risk and currency risk so it fundamentally is not arbitrage, but that doesn’t necessarily mean it’s a bad investment.
You’re probably underestimating how much currency assumptions are carrying the whole thesis. A lot of people look at USD/INR over the last 20 years and mentally convert that into guaranteed extra yield, but FX trends don’t move in straight lines for 30 years.
The biggest thing missing is that this isn’t really arbitrage. It’s a macro bet on:
* US rates staying attractive
* INR continuing to weaken steadily
* India not outperforming expectations structurally
* Inflation differentials staying wide enough
Also, a 30-year treasury at 5% is not fixed 9%. The 5% is fixed in USD terms. The INR return is variable because the FX component is variable.
Another thing is inflation. If INR depreciates 4% annually, that’s often tied to India having higher inflation than the US. So your “extra return” may not actually translate into dramatically higher real purchasing power for someone living in India.
The duration risk is also bigger than you make it sound. If rates move from 5% to 7%, a 30-year bond can get crushed mark to market. Yes, you can hold to maturity, but psychologically and practically, locking up capital for decades in a deeply underwater bond is not trivial.
There’s also reinvestment risk. Your coupons may not actually compound at attractive rates later.
And politically, capital controls are not impossible in emerging markets. Not saying likely, but over 30 years, a lot can happen on taxation, remittance rules, treaty changes, reporting burdens, etc.
I do agree with you on one thing though: for someone whose liabilities are in INR, owning USD assets can absolutely be a reasonable hedge. I just wouldn’t frame it as a near risk-free arbitrage. It’s more a long-duration currency + rates allocation that historically would’ve worked fairly well.