Done any carry trades?

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rock3r

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I'm still curious about how a body might directly invest in high-yielding forrin currencies like the Icelandic Krone, Turkish New Lira and the Brazilian real sans excessive layers of middlemen.

All three currencies have double-digit interest rates and represent a very nice earner for big business.

But Japanese housewives are making trillions from carry trading. Borrowing at home and investing in higher-yoelding.

If one were to borrow 15K from Halifax, you could easily whack inflation in the carry trade, by repaying at 6.9% and getting 17% from Istanbul.

But despite what certain people say, there's little clarity as to how to go about it.

Hey, central bankers, maybe you wouldn't need to pay such ruinously high rates if you'd only make it easier for Joe Smallinvestor to buy your goddamn bonds!

I would ask the mods to avoid the temptation to close off this thread and simply allow people to talk about it. Yeah, maybe something similar has been discussed before somewhere in the dusty archives, but markets have evolved since then and shutting down polite discussion is always bad.

The world won't explode if you allow a little bit of duplicated discussion
 
What's a "forrin" currency?
rock3r said:
If one were to borrow 15K from Halifax, you could easily whack inflation in the carry trade, by repaying at 6.9% and getting 17% from Istanbul.
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Are you sure that there are not a few Japanese houswives losing money on this game too? If it's such a no brainer then why is everybody not doing it - at which point any advantage would presumably disappear? Are you aware of the link between interest rates and currency value?
The world won't explode if you allow a little bit of duplicated discussion
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:rolleyes:
 
Not very tax-efficient. As I understand it, interest on overseas deposit accounts is taxable at your marginal rate of income tax. A top rate tax payer would pay 41% tax on all the interest from the foreign currency deposit, but would not be allowed to offset against this the interest paid on the borrowings made to make the investment.

So, in your example, you'd pay tax at 41% on the Turkish interest, reducing it to 10.03% nett. Deduct the 6.9% paid on the loan from Halifax, leaving a profit of just 3.13%. Not enough, in my view, to justify running the exchange rate risks involved.
 
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There are some ETFs that you could invest in that do something like what you are suggesting (possibly indirectly); for example, PowerShares DB G10 Currency Harvest Fund:

[broken link removed]

Quote: "The Index is comprised of currency futures contracts on certain G10 currencies and is designed to exploit the trend that currencies associated with relatively high interest rates, on average, tend to rise in value relative to currencies associated with relatively low interest rates."

Note that the managment fee is expensive for an ETF at 0.75% and ironically you probably would have to purchase this in US $.
 
Not really interested in paying a middleman. If the Brazilian gov't doesn't want to borrow money from me personally, they can just pay up to the middleman between them and the lender.

I'd be happy to accept a 15% rate from them, but because they insist on going through middlemen, they have to pay 17.5%.

I think I know why their country's so poor.
 
rock3r said:
Not really interested in paying a middleman. If the Brazilian gov't doesn't want to borrow money from me personally, they can just pay up to the middleman between them and the lender.

I'd be happy to accept a 15% rate from them, but because they insist on going through middlemen, they have to pay 17.5%.

I think I know why their country's so poor.
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Perhaps the Brazilian government is unaware of your willingness to lend to it at 15%. Why don't you call the ambassador and put your plan to improve his country's prosperity to him?
 
gonk said:
Perhaps the Brazilian government is unaware of your willingness to lend to it at 15%. Why don't you call the ambassador and put your plan to improve his country's prosperity to him?
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Why even talk to the ambassador? Sure he's only a middleman for the President ...
 
Are you saying I'm the only guy on Earth who'd jump at the chance of 15% returns? I doubt it.

So, what purpose do these middlement serve?

My own presumption is that perhaps possibly somebody in the powers that be in Brazil is having his pockets lined very handsomely by some of the aforementioned middlemen for needlessly restricting access to these bonds.

Or perhaps you think that Brazil is so prosperous that it can afford to turn up its nose at small investors, only accepting funds from more costly entities?

Seriously, how does any Brazilian benefit in any way from people like me being unable to buy its bonds?

If you're willing to pay 17.5% to a mega-institution, how is it in your interest to refuse to pay less to a small individual who's money is just as good as the institution?
 
room305 said:
Why even talk to the ambassador? Sure he's only a middleman for the President ...
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Brazil has seperation of powers, it's not the prez' job to borrow money.

It is the Treasury's job to borrow money. And its job is to do so at the lowest rate feasible.

Right now, it's failing to do its job.
 
Many institutions/states/companies etc. who issue debt don't want to deal directly with Joe Public, for a wide variety of reasons-legislation, expertise, efficiency, underwriting etc. etc.
 
rock3r said:
Are you saying I'm the only guy on Earth who'd jump at the chance of 15% returns? I doubt it.
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No, the poor Italian retail customers loved the wonderful returns that Argentina were providing a few years back and the banks loved selling it and as we all know countries don't default!
 
rock3r said:
Are you saying I'm the only guy on Earth who'd jump at the chance of 15% returns? I doubt it.
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If you were borrowing at 6.9% to fund the investment and, as outlined above, you pay tax at 41% on the 15% returns, your nett gain would be 1.95% p.a. Brazilian inflation for 2007 is forecast to be about 3.7% - meaning your real rate of return is negative: -1.75%. Not something which I would personally jump at . . .

The tax-inefficiency and exchange rate risks, whether for a geared or ungeared investment, would make it a non-starter for me. Of course, that's just my opinion - YMMV.
 
Sunny said:
No, the poor Italian retail customers loved the wonderful returns that Argentina were providing a few years back and the banks loved selling it and as we all know countries don't default!
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Yeah, but that's really the investor's look-out. No business of the bond issuer. Unless he feels that non-institutional money has cooties.
 
The bond issuer may not want general public hysteria hitting the front pages if their debt takes the odd dive-professional investors are much more savvy and less excitable.
 
rock3r said:
Yeah, but that's really the investor's look-out. No business of the bond issuer. Unless he feels that non-institutional money has cooties.
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A bond purchase isn't necessary to play the carry trade. Rather than sitting on the sidelines cribbin' and moanin' about the small investor being excluded from the bond market why not play the currencies market via Oanda? They don't have the Brazilian real spread available but there are other high yielding currencies like the US dollar or New Zealand dollar. No minimum trade and they pay the carry interest if you're short which can be significant (e.g. Yen/NZD).
 
Yes-I would have thought the same thing-just do spot FX or borrow in one country and deposit in another.
 
room305 said:
A bond purchase isn't necessary to play the carry trade. Rather than sitting on the sidelines cribbin' and moanin' about the small investor being excluded from the bond market why not play the currencies market via Oanda?
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Because Oanda ain't what I have any interest in. Broken things are far less likely to be fixed if nobody complains, and Brazil's broken on many many levels.

The notion that they're less likely to get bad press if they exclude all non-institutional investors seems like a shriekingly bad idea to me: they're paying billions of dollars in interest more than they need to and they're not even guaranteed to get good press in return.

Brazilian kids are dying in hospitals right now for lack of funds, and Brazil's leaders think they can afford to be choosy about who they borrow from?
 
rock3r said:
Because Oanda ain't what I have any interest in. Broken things are far less likely to be fixed if nobody complains, and Brazil's broken on many many levels. . . .Brazilian kids are dying in hospitals right now for lack of funds, and Brazil's leaders think they can afford to be choosy about who they borrow from?
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So you actually want to get involved in the carry trade to help sick Brazilian children?

Sorry, I thought you were asking a serious question in your first post. I've been a bit slow in realising all you wanted was a game of "Why Don't You -- Yes, But . . ."
 
Just give your money to charity. Or go work with Brazilian street children. Or why Brazil? Why not Zimbabwe? Or Darfur?

Or go run against Lula next time he's up for election?

It's apparent that this is just a rant as opposed to a question on investing. When you meet the criteria, post in Letting Off Steam. Until then...
 
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