Itaú BBA - Adding Steepeners

Latam FI Strategy Monthly

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Adding Steepeners

June 19, 2015

We are recommeding steepeners in Brazil and Mexico.

For the full report, see enclosed file 


  • Over a month, Latam currencies weakened relatively in line with EM FX, amid a backdrop of renewed USD strength. Latam yield curves steepened, in general, reflecting the worldwide sell-off in long rates. Brazil was an exception, as the BCB continued to tighten the Selic rate and kept a strong message, prompting further increases on the front end. The back end has barely moved, as the market still shrugs off the heightened budget risks.  
  • The BRL has lost 3% in about a month, but our fair-value models suggest that the Brazilian currency could have weakened more. The CLP was the worst currency in the region (-5% for the month), after outperforming Latam FX for several months. Looking ahead, our models point to losses for the BRL and gains for the CLP. This results from our scenario of higher U.S. rates and stronger USD, affecting the BRL more intensely than the CLP.  The increased execution risk on Brazil’s fiscal adjustment and our team’s projection of stable copper prices until yearend may also support our trading recommendation to go long CLP and short BRL. We entered with the BRL/CLP cross at 206.07, and our target is 196.63 (stop: 211.05). We are neutral on MXN and COP for now.

  •  We see Latam rates fairly priced on the front end, expect for Mexico, where we expect Banxico to start hiking rates after the Fed (suggesting downside risk for short rates). In general, the belly and the back end of Latam yield curves remain largely correlated with global rates, and still look rich under scenarios of Fed Funds rate normalization (as suggested by the FOMC dots). Brazilian rates have been less correlated with FX rate and U.S. Treasuries, as monetary policy expectations take a leading role. We believe increased difficulties on the fiscal side may start to have more visible effects in Brazil’s long rates. 

  • We summarize our recommendations below:

In Brazil,  we recommend paying the Jan25 and receiving the Jan16, DV01-neutral. We entered at 174bps, and our target is 100bps (stop at 210bps). As per linkers, we suggest a neutral stance vis-à-vis the respective benchmarks.

We are starting a trading recommendation to add steepeners in Mexico (TIIE IRS), receiving the 1-year and paying the 10-year, DV01-neutral. The spread now is 267bps, and our target is 315bps (stop at 245bps). 

We maintain our recommendation for payers in Colombian yield curve at the 5-year zone. IBR swaps for this tenor is now running just below 5.35%. Our target is 5.75% (stop at 5.00%).  

In Chile, we are neutral on rates for the time being. 


Open Recommendations 

Closed Recommendations





Ilan Goldfajn - Chief Economist
Caio Megale
Mauricio Oreng,

Luiz Gustavo Cherman,
Eduardo Alonso,
Marcela Rozo,


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