Itaú BBA - Sidelines in Brazil, Payers Elsewhere: PART 2: RATES

Latam FI Strategy Monthly

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Sidelines in Brazil, Payers Elsewhere: PART 2: RATES

December 17, 2015

The heightened (domestic and external) uncertainty warrants defensive positions

For the full report, see enclosed file 

Highlights

  • Latam local rates were under pressure lately, following the gain in U.S. Treasury yields, the commodity rout, and idiosyncratic macro concerns. The latter effects drove CDS spreads higher (especially in Brazil and Colombia), spilling over into local rates. Yields rose in Chile as well. And we see the recent flattening in Mexico as temporary.

  • Our simulations and scenario point to higher U.S. Treasury yields in 2016, as the Fed policy normalization process unfolds (assuming stable commodities and softer USD gains). We still see the widening in U.S. yields as key driver for long rates in Latam.   

  • We maintain our opinion that the hefty risk premia in Brazilian yields is not necessarily indication of “cheapness”, given the unsolved fiscal difficulties. The lack of visibility for macro and political scenarios ahead also makes it quite hard to tell premia from expectations. Treasury bond issuances picked up in November, but the supply of duration risk (DV01) remained below the recent average. The favorable technicals were insufficient to prevent from another major sell-off in Brazilian rates, recently.
  • In other Latam markets outside Brazil, the term-structures showed a heterogeneous pattern in recent weeks, reflecting the differences in macro vulnerabilities and outcomes for FX, inflation (expectations) and monetary policy. Colombian rates underperformed, following the massive COP depreciation, the unfavorable CPI surprises and the continued rise in inflation projections. Those elements fed market perception of risks for yet more Banrep tightening than indicated by analysts’ surveys.

  • As per our recommendations:

Brazil – The heightened (domestic and external) uncertainty warrants defensive positions. Reduce duration exposure and favor linkers versus nominals, despite the hefty breakeven and premia. In NTN-Bs: we like the sector between 2019s and 2022s, especially the 2020s. But we still look for better entry points to formally build a position. Stay on the sidelines. 

Mexico – Despite a temporary Banxico-Fed decoupling, we still see room for higher long yields in Mexico, accompanying a move in U.S. Treasuries. We keep our payer in TIIE swaps at 7-year region (entry: 5.80%; current: 5.89%; target: 6.50%). Although Mexican term structure is the steepest in a sample of EMs and DMs, fundamentals still favor lower rate on the front end (as Banxico delays hikes) and higher rates at the back end (following U.S. yields). We keep our 1y10y steepener in TIIE swaps (entry: 252bps, last: 237bps; target: 320bps). Although Breakevens (temporarily) stand at multi-year lows, we see Udibonos well priced, with no opportunity in linkers. 

Chile – We continue to see upside for long yields in Chile, accompanying a move in the U.S.. We keep our payer on 7-year Camara swaps: we entered at 4.37% and the yield is now 4.63%, prompting a PNL gain of 159bps so far. Reduce positions in BCUs (linkers), as we see upside for real yields ahead.  

Colombia – Our forward analysis suggests rates are well prices at the back end of IBR swaps. We recommend switching out of the Coltes Jul-2024s (at 8.43%) into the Coltes Jul-2020s (at 7.79%). 

Overall, we are neutral on the front end of local rates (except for the OW in Mexico, UW in Colombia), and underweight in all markets at the back end.


 


MACRO TEAM:

Ilan Goldfajn - Chief Economist
Caio Megale
, caio.megale@itaubba.com
Mauricio Oreng, mauricio.oreng@itaubba.com

Luiz Gustavo Cherman, lcherman@itaubba.com
Eduardo Alonso, eduardo.marza@itaubba.com
Adriana Reali, adriana.reali@itaubba.com



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