How Treasury Head of Bank of Baroda made profits in Indian bond markets when most others made losses..

Nice story by Anto Antony and Kartik Goyal of Bloomberg Quint. The financial media rarely profiles fund managers in bond markets and even rarer to see the fund manager from a public sector bank.

Recently fund managers in Indian bond markets went through a tough ride as yields of government bonds rose significantly. There was one fund manager Kamal Mahajan of Bank of Baroda who did well. Why?

The answer is simple: He went contrarian. When all others were buying as RBI was cutting rates, Mr Mahajan started selling as he though rate easing cycle was about to end.

Kamal Mahajan says he’s being asked just one question: how did he make money as peers lost $4.4 billion during India’s worst bond-market rout in two decades?

The answer, according to the head of treasury and global markets at Bank of Baroda, goes back to a contrarian bet taken two years ago. As the Reserve Bank of India started an easing cycle in 2015, eventually cutting policy rates seven times, bond yields fell to levels not seen since the global financial crisis. While investors were lured into a one-way bet, Mahajan thought differently.

“Traders, however experienced they are, tend to be carried away by the market noise,” said Mahajan, who manages $20 billion of sovereign debt at India’s second-biggest state lender. “Our model predicted the tightening cycle two years back and we started positioning ourselves for this well in advance.”

His desk began selling long bonds and buying paper that matured in four years or less, while also bulking up on 200 billion rupees ($2.9 billion) of floating-rate debt from August 2016. That very month, pressure was mounting on the central bank to cut interest rates further as the latest data showed slowing economic growth.

The benchmark 10-year bond yield would sink to a seven-year low just three months later, raising questions over the strategy. Backed by Chief Executive Officer PS Jayakumar, the 59-year-old stuck to his guns.

“When yields were lower than 7 percent we didn’t buy while many other desks kept on buying,” said Mahajan. “Conviction in one’s models and formula is very important to ride through the market noise that opposes your stance and to come out on top on the other end.”

Yields would climb more than 180 basis points from that nadir to touch 8 percent this month, as oil prices surged and investors became increasingly concerned about Prime Minister Narendra Modi’s expanding debt sales and fiscal discipline. In April, RBI shocked traders when minutes showed a tilt toward tightening, with a hike taking place two months later.

Losses mounted for local lenders, the biggest holders of sovereign debt.

It is such a similar story one sees spanning across years of financial cycle. It takes time for contrarian bets to unfold but they do and those who have the patience and money to hold out, make a lot of money.

In the end he leaves a valuable lesson:

“To ride the yield curve and not get persuaded by current events, the senior treasury team needs to look beyond the present time horizon,” Mahajan said. “I am not good at trigonometry or statistics. But I went through the last 30 years and formed this model based on basic logic.”

Indeed. But then we always forget this lesson..

2 Responses to “How Treasury Head of Bank of Baroda made profits in Indian bond markets when most others made losses..”

  1. ashok singhania Says:

    reason mr mahajhan has suceeded is demonatisation and ausurity practise by modi govt. one more policy of inflation targeting which has force modi govt to reduce public sector unit surpluses as well increase pay of central govt employees.. this all act have acutually reduce reserve money in banking system and has lead to rise of intrest rate. exactly reverse happened during vajapee era as govt increase fiscal defecit increase high value currency to 53% and spend entire surplus of public sector units. result intrest rate came down. banks book huge treasury profits.

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