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What is Short Term Rates telling us

I think we are coming at the fag end of Rate Cycle.

Few Facts :

Short Term rates has already doubled
1-10 Yr Spread is 10 bps.
5 Yr OIS - 10 Yr spread is -ve.
Repo-CD rate at historic high (Sparing 2008 spike)
Supported by fact that Inflation may cool down by Sep.

It leads us to interprete that we have peaked in terms of Short Term rates. So good to Invest in Short Term Funds or Lock in FMP for 2-3 Years.

In terms of  10 Yr G-Sec, Yield curves need to steepen and hence there is a scope of upward yield for 10 Yr. Considering heavy implication of Oil on Fiscal policy, we should wait for second half borrowing program befor taking view on 10 Yr.

Also Short term rates has great predicting power for equity return for 2-3 Year Period. So if Short term Interest has peaked equities will find Bottom in next 3 Months. Last leg of rate hike is most painfull. One needs to get interested in equities post 16th June Credit Policy.

Happy Investing




Comments

  1. falgun4 June 2011 at 07:18

    Chetan Bhai, very good stuff.. You are as always fierecely logical and gave a very good correlation predictions for equities.. You may want to incorporate following 3 points..
    1. Middle east geo political and it's impact on oil and hence inflation, deficit and interest rates..
    2. European debt crisis and failure of one or more country from Greece, Portugal, Spain etc..
    3. Hi unemployement and very slow recovery in US leading to very long easy monetary policy in US..

    Thanks,
    Falgun

    ReplyDelete

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