I have been pondering the idea of USD/Chinese Yuan carry trade for a while now. The investment thesis is one can borrow USD on the cheap and put to investment vehicles denominated in Chinese Yuan with much higher return. And assuming the Chinese Yuan will keep its secular trend to become stronger vs. USD over time, or at least stay flat, one can pocket a decent return from such arbitrage.
Having been exposed to the Chinese financial market for over a decade, I see quite a lot of attractive investment options yielding 8% or higher with minimal risk lately. The other piece of the carry trade puzzle, is how to borrow US dollars at the lowest cost possible.
One source I'm looking at is Interactive Brokers. Interactive Brokers probably is not as well-known as TD Ameritrade, E*Trade, Fidelity or Charles Schwab, but it offers a wide menu of investment options at commission rate as low as $1 for 100 shares of stock (it does charge a monthly minimal commission of $10 if account value is under $100,000 though).
Even lesser known is Interactive Brokers offers very cheap margin loans. According to its website, Interactive Brokers, as of this writing, offers USD-denominated margin loans at 1.56% (1.5% margin over Feb overnight rate of 0.06%) for the first $100,000, 1.06% for the next $900,000, 0.56% between $1M and $3M, and 0.50% after that.
1.56% is a steal if you compare it to what peer online stockbrokers charge. For example, Fidelity's margin rate starts at 8.575% for the first $10,000 and gradually reduced to 7.075% for balance between $50,000 and $99,999, and 6.575% for balance between $100,000 and $499,999 and 3.75% above $500,000.
E*Trade is in the same camp: 8.44% for the first $25,000, dropping to 7.94% for the next $25,000 and 7.44% for balance between $50,000 and $99,999.
TD Ameritrade is even more greedy, charging 9.00% for the first $10,000, 8.75% for the next $15,000, 8.50% for balance between $25,000 and $49,999 and 7.50% for balance between $50,000 and $99,999.
I have been using Interactive Brokers for over six years and I'm thinking of consolidating my 1,000 Berkshire Hathaway Class B share at Interactive Brokers to take advantage of its low-cost financing.
Also, according to IRS rules, interest expense paid to purchase an investment is generally deductible to certain limit, making it even a better deal to borrow.
Of course, it is important to call out that the margin rate at Interactive Brokers is pegged to Fed overnight rate, which is a moving target and can move up materially if Feb adjusts its monetary policy.
Over the past decade, I have never invested using borrowed money. For this one, I also would like to take baby steps until I'm more knowledgeable of how to make the carry trade work.
What's your experience using margin? And do you have options getting better margin rates?