Itaú BBA - The Search for Yield Supports Local Rates

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The Search for Yield Supports Local Rates

August 19, 2016

The rally in the Brazilian rates took a breather, but inflation expectations have reacted to BCB’s guidance

For the full report, see enclosed file

Highligths

  • Emerging markets (EM) have been enjoying a good global environment, with still-ample global liquidity and clearer signs of economic recovery. Asset prices have, for the most part, benefited, posting significant rallies year-to-date.

     

  • While a single interest-rate increase by the Fed is, in our view, unlikely to change this picture, it could support the USD in 2H16, preventing a further broad-based appreciation of EM exchange rates and helping to depreciate currencies with stretched valuations.

     

  • The rally in the Brazilian rates took a breather over the past month. Nonetheless, both asset-implied and survey-based inflation expectations have reacted to BCB’s guidance. The 1y1y breakeven has edged closer to the professional forecasters’ expectation. The premium embedded in the former is currently at only 20 bps – well below the average gap of 62 bps.

     

  • Elsewhere, yields rallied across the board. The Chilean and Mexican term structures took the route south. The front end of the Colombian curve remained pressured by the challenging inflation outlook, whereas longer-dated rates outperformed peers. However, we argue that Colombian rates will underperform as the market re-calibrates to the upside the odds of a Fed rate hike in the near term.

     

  • In this month Box, we study the role of the MXN as a LatAm-risk hedge.
     

 



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