Itaú BBA - Weekly FI LatAm Strategy: Pension reform to be sent to Brazilian Congress

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Weekly FI LatAm Strategy: Pension reform to be sent to Brazilian Congress

February 18, 2019

We prefer to be on the sidelines for now, as this long process of the reform in Congress involves significant risk

ALL LATAM: Trade talks between U.S. and China will continue this week in D.C.. Further progress towards a trade deal, coupled with a gradual deceleration in the U.S. and signs of stabilization in China’s growth, may have a positive impact on EM asset prices.

Local rates in LatAm were broadly stable last week, except in Brazil where rates tightened significantly. Chilean rates widened 2bps at the front-end, while Colombia’s rates declined by the same amount, benefiting our trade paid at the 1-year local rate in Chile and received at the 1-year local rate in Colombia, now with a 7bps gain (see trade idea). We are maintaining the position, as we believe the spread between Colombia and Chile’s 1-year rates may continue declining ahead.

BRAZIL: Local rates tightened substantially last week, erasing the widening of the previous week, as a strong proposal for pension reform was announced and BCB governor changed slightly the tone on monetary policy. Nominal rates declined more than 30bps at the long-end and around 15bps at the belly. President Bolsonaro approved proposing a minimum retirement age of 65 for men and 62 for women, with a transition in 12 years, which indicates an ambitious reform. In addition, BCB governor argued on Wednesday that “testing new lows for the Selic rate must be made with caution”, after the Copom statement and minutes released previously had indicated no willingness to further stimulate monetary policy. The speech opened a new wave of receivers at the front-end and belly of the curve, while news on the pension reform proposal led to a decline in longer rates.

We have no position in Brazil today, mainly because of uncertainty around the pension reform process in Congress. The ambitious pension reform is scheduled to be announced by President Bolsonaro and sent to Congress this week (Wed.), and will need to be discussed and analyzed by the commissions in the Lower House. This is a process that takes months, and sets the likely timing of vote in the Lower House floor only by June/July, or in early 2H19. After strong gains receiving rates at the belly and long-end since October last year (see table), and given the historically low level of rates observed today, we prefer to be on the sidelines for now, as this long process of the reform in Congress involves significant risk.



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