Itaú BBA - Stepping out of the short Colombia CDS – Sovereign Debt Trade Idea

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Stepping out of the short Colombia CDS – Sovereign Debt Trade Idea

March 21, 2018

We are stepping out of a short position in Colombian CDS

On December 20th 2017, we recommended to pay protection in Colombia’s 5y CDS at 107bps (link), because of the country’s structural fiscal challenges, a wide current account deficit, the expectation of tighter global financial conditions, our call for lower oil prices and the uncertainty over the upcoming Presidential elections.
 

Today we step out of this position with the CDS at the same 107bps. On the external front, we still believe oil prices will come down from current levels and the Fed will tighten monetary policy by more than the market is pricing in. However, current account deficit is narrowing faster than we anticipated (link) and the political scenario is becoming less risky. In fact, the March 11th Congressional elections showed that both chambers will continue to be dominated by established center-right parties and polls and primary elections indicate a lower probability of an outsider or populist candidate winning the presidential race.

We continue to receive the front-end of Colombian local rates (link), despite yesterday’s decision to maintain rates on hold. We believe inflation is on a declining trend and expect Banrep to engage in further easing in its April meeting.



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