Itaú BBA - Is it time to pay (rates)?

Latam FI Strategy Monthly

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Is it time to pay (rates)?

February 13, 2015

In Latam, not only currencies continued to weaken, but also yields started moving higher

For the full report, see enclosed file 

Highlights

  • Apparently, the temporary return of the carry trade (theme of our last monthly report) was yet shorter than we had thought. In Latam, not only currencies continued to weaken, but also yields started moving higher, nearly erasing positive returns accumulated across January (Colombia being a notable exception, supported by the stabilization of oil costs).
  • The odds continue to favor a mid-2015 liftoff by the Fed, a scenario that is gradually being put back into the pricing of fixed-income assets. The uncertainty as per the level of terminal Fed Funds rate will probably not prevent from a sell-off in U.S. Treasuries across all maturities. And the USD is to re-gain momentum as it happens.

  • For Latam FX, the implication is an underlying trend of depreciation. But we are tactically neutral in all currencies under our coverage, as the strong USD trend and scattered episodes of risk aversion (e.g., a Greek exit) might be counterbalanced in the short run by a slight upward adjustment in oil costs (as the crude reaches a new settling point following the recent slump). As per the BRL, also affected by local macro uncertainties, we see a more limited downside after the recent sell-off (which drove it close to our yearend projection).

  • For Latam rates, we now see the global scenario “conspiring” for higher yields, especially in the belly (but, possibly, also in the long end). With remaining uncertainties about commodity prices and timing of Fed hikes, our recommendation is to gradually add payers in the region, except for markets where the central bank is about to be in easing mode soon (case of Colombia).

In Brazil, we see room for the (DI futures) curve to reverse a bit the flattening trend in place since November: we see excessive premium in the belly (given the weak activity) and a little upside for the long end (as markets get cautious about the difficulties to implement macro adjustments). We are opening a recommendation to receive DI Jan17 and pay DI Jan21, DV01 neutral. The gap is 59bps now, and our target is zero (stop at 90bps).

In Mexico, since we look for higher U.S. Treasury yields, we maintain our target for 5-year TIIE IRS payer at 5.75% (today: 5.22%). While forward rates suggest that Banxico hikes are fairly priced in, we still hold a paying exposure at the 2-year sector.

In Chile, we recommend using the high correlation between Camara swaps and U.S. Treasuries in the long end, but protecting from a possible decline in copper prices. Our trading idea is to pay the 5-year and receive the 2-year, with target at 90bps and stop at 40bps (current gap: 59bps). 

In Colombia, although rate cuts are partially priced in the curve, we still see room to receive, given the downside risks for activity led by the oil decline. We are receiving 2-year IBR swaps (currently at 4.3%), with target at 4.00% and stop at 4.45%. 


 

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