Itaú BBA - Taking profits on Colombian local rates – Local Markets Trade Idea

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Taking profits on Colombian local rates – Local Markets Trade Idea

December 21, 2017

We believe the yield curve pricing is now fair, and therefore we are taking profits on the trade.

STRATEGY TEAM:
 

Ciro Matuo, CNPI, ciro.matuo@itaubba.com
Eduardo Marzaeduardo.marza@itaubba.com
Luka Barbosa, lbarbosa@itaubba.com


On September 12th we recommended to receive Colombian 18-month IBR rate, as we expected Banrep to cut more than the market was expecting at that time (link trade idea).

The trade has earned a solid 64bps carry-adjusted profit.

Banrep has cut the policy rate by 25bps twice since we entered the trade and now the curve prices in additional 60bps in cuts over the next 6 months. This would bring the policy rate to a level slightly higher than 4.0% over the next 6 months (from 4.75% today).

We believe the yield curve pricing is now fair, and therefore we are taking profits on the trade. Although economic activity remains weak and inflation is expected to fall next year, we don’t see big chances of Banrep cutting the policy rate below 4.0%, especially in an environment of tightening global financial conditions, and Colombia with some risk of losing its investment grade.

 



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