Daily Voice | This CIO sees US 10-year bond yields hitting 5.3% soon, here's why

Yes, it is highly likely that uncertainty will continue for some more months, and that means patches of increasing and decreasing volatility in markets as well as the continuation of sector rotation. So there would continue to be opportunities to create alpha by playing the volatility via long-short approaches as well as tapping into the sector rotation and choosing the right sectors via long-biased approaches. These are our areas of focus and we are excited by their possibilities going forward.

Do you think the Fed will keep interest rates higher for longer than raising rates again?

If you look at historical macros of the past century, high inflation has been stickier for longer than most expectations and from that perspective, rates could remain higher for longer than people expect.

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Further, there are too many challenges globally on the macro front with high US debt, geopolitical tensions and other factors which would also weigh on the bond market in turn supporting the interest rates. Hence, from all angles, higher rates for longer or rising further is definitely a high probability currently.

What are the significant emerging investment themes in India or globally currently? 

I am a quant and run quant/systematic models, whether on fundamentals or technical/statistical factors. So from that perspective, for India, I would say there is huge scope for such quant & systematic approaches to perform strongly on a risk-adjusted-returns basis over the next 5-10 years as these strategies are in their infancy currently in India but are powerful enough to generate meaningful alpha over long time horizons as has been seen with many global quant and systematic funds.

In fact, many in India are unaware that the list of the Top 10 funds globally in terms of both AUM and performance over the past many years has been dominated by quant firms! So whether it be in the domain of long-only or long-biased approaches or long-short approaches, quant and systematic funds have immense scope in India over the next 10 years!

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What are the key quantitative factors that are driving the market today and What are the key technical factors that you are watching right now?

The US 10-year yields are definitely the most important factor being watched globally currently. We are also watching this because as per our analysis, there is scope for them to move higher and if that happens, markets could become more volatile and nervous initially but would be followed by attractive opportunities thereafter.

I am also closely looking at seasonality patterns of markets being soft in September/October but rallying from November till the first week of January which so far seems to be playing out as anticipated and hence of interest in the near term.

Over a 6-month horizon, the tendency of Indian markets to rally into General Elections is also a bias that has to be kept in mind while looking at various strategies in the near term.

What sectors or asset classes do you believe are most attractive from a quantitative perspective?

We have a good sector rotation model but it is updated on a monthly basis. The underlying idea is that whether markets are good or bad, there are always certain sectors that are doing much better than others.

So at any point in time, by betting on the most attractive sectors, one should be able to deliver alpha relative to index benchmarks. Our model has been showing such alpha for a long period of time.

Currently, it is long infra, auto, FMCG and metals but there are some minor changes every few months so this list has to be updated on a monthly basis.

However, some of these sectors have been coming regularly over the past year and have already delivered strong alpha. So such an approach can be robust and attractive over all market conditions thereby being of high interest to us.

After reading the IT companies' September quarter earnings, do you think FY24 would be a better year for tech firms?

The quarterly earnings have been mixed, with some companies meeting or exceeding expectations while others have disappointed. The same picture can be seen on long-term cycle analysis and technical charts where some stocks in the IT sector are showing bullish solid signs and are at or near all-time highs while others are painting a dull to negative picture.

So there seems to be good dispersion among stocks in this sector and hence good opportunity to create alpha via a long-short approach by going stocks that are attractive on both fundamentals and technical while going short on those that are unattractive by combining both approaches.

Do you see the possibility of the US 10-year treasury yield surpassing 5 percent mark soon?

Purely from a long-term technical and cycle perspective, the next meaningful resistance in 10-year treasury yield is around 5.3 percent, so while whole numbers like 4 percent and 5 percent are psychologically important resistances, the natural meaningful resistance will come in about 5.3 percent in the near-term and hence 5 percent should be surpassed soon.

However, from a long-term perspective, remember that these 10-year yields broke out of a 30-year downward channel in April 2023 so it is a very long-term phase change that has happened only a few months back. So there will be an upward drift in these yields for a very long period of time in my opinion.

What are some of the biggest challenges and opportunities facing quantitative hedge funds in today's market?

The biggest opportunity for quant hedge funds especially in India in today’s market is that many varieties of strategies can be combined to create a smoother return profile which means better risk-adjusted returns compared to traditional fundamental approaches. Also, as quant funds can tap into various long-short opportunities using the derivatives market which are non-existent in the cash equities market, there are more avenues to deliver alpha e.g. going long or short volatility using options, playing relative volatility trades, market-neutral strategies, dispersion, sector rotation and many more.

There can also be better risk management as sophisticated risk rules can be intertwined into the portfolio management and trade generation rules to ensure certain risk constraints are always adhered to – this is very difficult to implement in discretionary approaches and much easier to implement via quant approaches and hence a big advantage and differentiating factor for funds like ours.

The challenges for quant funds remain the same: risk of overfitting is always there, however experienced one may be. We can minimize the chance of the same but can never be sure it is zero. There are ways to be conservative on expectations due to this which experienced players like us do by discounting the model returns while magnifying the risk and still ensuring that this reduced return vs increased risk numbers still lead to attractive risk-return ratios.

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Further, the risk of over-crowding is there at all points in time as certain strategies which make strong returns come to everyone’s notice and hence become popular with larger sections implementing them due to which the returns reduce. This is happening somewhat in the index options market currently in India but all quant strategies are susceptible to this. I have had a multi-strategy multi-model multi-bucket approach so as to not be dependent on any 1 strategy or market condition thereby also reducing over-crowding risk and being all-weather.

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