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Borrow money in the US to invest in EM
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Borrow money in the US to invest in EM

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Borrow money in the US to invest in EM

Hello -

I've learned interest rates parity in school and it doesn't make sense to me in real life. If govt backed bonds in relatively strong EM economies (India, Brazil) are offering 9%+ interest and if it costs me 5%-6% to borrow money in the US why not borrow and invest? Take away a 1% for t-cost and I'm still looking at free money. I of course take on forex risk but even after hedging forex there isn't true "parity". Am I missing something here?

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  #3 (permalink)
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duffman View Post
Hello -

I've learned interest rates parity in school and it doesn't make sense to me in real life. If govt backed bonds in relatively strong EM economies (India, Brazil) are offering 9%+ interest and if it costs me 5%-6% to borrow money in the US why not borrow and invest? Take away a 1% for t-cost and I'm still looking at free money. I of course take on forex risk but even after hedging forex there isn't true "parity". Am I missing something here?

What happens if they stop paying...? The Bonds that is...

What would you use for collateral? How would you make a big enough dent for this to make sense....

To me, this is what the big guys do... Little guys do stuff like Take out an LOC on their home at 5% and buy a rental unit etc.. same concept..

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duffman View Post
Hello -

I've learned interest rates parity in school and it doesn't make sense to me in real life. If govt backed bonds in relatively strong EM economies (India, Brazil) are offering 9%+ interest and if it costs me 5%-6% to borrow money in the US why not borrow and invest? Take away a 1% for t-cost and I'm still looking at free money. I of course take on forex risk but even after hedging forex there isn't true "parity". Am I missing something here?

True, this happens, and loads of people are doing this.

Same this in a smaller scale, I instructed a Investor who had Fixed deposits with Banks in India @8%, I got them pledged and took a Loan against them @9%, the money was invested in 12.25% Corp Bond.

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