Itaú BBA - Extend Duration in Brazil – Local Rates Trade Idea
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Extend Duration in Brazil – Local Rates Trade Idea

January 7, 2019

We recommend receiving NTN-B 2050 at 4.84%.

We recommend extending duration in Brazil and receiving NTN-B 2050 at 4.84%. Nominal rates have been rallying hard since mid-September. Real rates also tightened, but are clearly lagging, and break-even inflation stands at historical lows. After a good gain receiving the DI Jan 21 nominal rate (see table), we are now recommending to receive the long-end of real rates.

We highlight three important developments on the reform agenda. First, President Bolsonaro’s initial popularity numbers are high, with 64% of Brazilians viewing the government as “good” or “excellent”. Second, there was substantial news last week indicating Rodrigo Maia, a supporter of the pension reform, is likely to be reelected as Lower House speaker in early February, with the official support of PSL and other parties. Third, government officials, including the President, indicated last week that the government will try to approve (with some changes) the current pension reform proposal, which already cleared the Lower House commissions and is ready to be voted. If confirmed, this will allow for a much faster process of approval than if they decide to announce an entirely new proposal.

In addition, we believe the real neutral interest rate in Brazil has shifted downwards to around 2.5% / 3.0%, mainly because of financial deepening and the fiscal adjustment being carried out since 2015. Full report here.

The main risk to the trade is frustration with the pension reform in Congress. But the developments mentioned above reinforce our base-case that a meaningful pension reform will be approved this year.

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