PERFORMANCE APPRAISAL

It is important to assess periodically what’s working and what’s not.

I will start with the trades with mixed results.

1. Long Indian bonds: I bought Indian bonds on December 14, 2008 (LONG BOND TRADE NOT DONE YET: EXPECT YIELD LOWS SET IN THE PREVIOUS CYCLE TO BE BROKEN). My prediction was that cash would outperform derivatives and within cash, I thought that a diversified basket of AAA corporate paper will swamp treasury returns. The market rallied. On December 28, 2008 (TACTICAL NOTES FOR EARLY 2009), I reiterated my buy call based on strong indications from authorities that rate cuts were imminent and that the likely easing was not priced in. The Reserve Bank cut the reverse repo rate by 100bp, but government securities sold off on fears of impending supply. On January 11, 2009, I built further positions given attractive valuations post the ascension in yields (SHARP SELL-OFF IN THE BOND MARKET UNIQUE OPPORTUNITY FOR INVESTORS; 10-YEAR GOVERNMENT SECURITY YIELD TO SETTLE BELOW 5% EVEN WITHOUT RATE CUTS). The market moved in my favor last week. Overall, the results are mixed.

I am still overweight Indian bonds because supply is really not an issue, in my view. Slackening private investment demand will create space for government bonds on bank balance sheets. I am also expecting the Reserve bank to reduce the reverse repo rate by at least 50bp in H1 2009

Now I will cover trades that made me money.

2. Long U.S. Dollar: Long USD/INR up 2.5% and long UUP up 2.9%. I shorted the INR versus the dollar on December 22, 2008 (INDIAN RUPEE: THE END OR MERELY A BEND? RISK REWARD NOT GREAT FOR INDIAN RUPEE LONGS; NOT EVEN WHEN EQUITIES RECOVER). The INR has weakened 2.5% since then (47.38 on December 22, 2008 to 48.77 on January 19, 2009). I bought UUP (DXY) on December 29, 2008 (TACTICAL NOTES FOR EARLY 2009). The U.S. dollar has gained ground in the first half of January. As discussed in the rationale for the trade, global central banks followed the Fed in the march toward ZIRP in early 2009. The end of the risk rally also helped the dollar.

3. Long U.S. Credit: Long HYG (U.S. high-yield) up 0.9% and LQD (U.S. Investment-Grade) up 1.0% (TACTICAL NOTES FOR EARLY 2009). The correct way to gauge the performance of spread products is after adjusting for returns from duration matched treasuries. I shall not make that adjustment because I consciously assumed duration exposure in addition to spread risk. Bear in mind, however, that TLH (10-20 year treasury ETF) is down 2.3% during the same period, underscoring the out-performance of corporate paper.

4. Long U.S. 10-year break-even inflation: (Long TIP versus TLH) up 1.6% (TACTICAL NOTES FOR EARLY 2009): 10-year breakevens are about 40bp wider now. Also, 5-year breakevens 5-year forward have gone up, but remain well below 2% - where the Fed seeks to anchor long-term inflationary expectations.

*******29-Dec-08**16-Jan-09***Change
TIP*****100.4******99.696******-0.7%
TLH*****122.68*****119.88******-2.3%
HYG*****75.29******75.99********0.9%
LQD*****100.58*****101.6********1.0%
UUP*****24.69******25.4*********2.9%

************22-Dec-08**19-Jan-09******Change
USD/INR******47.38******48.56**********2.5%

Source: MarketWatch;RBI