Itaú BBA - Weekly Fixed Income LatAm Strategy: The rally in Brazilian rates continues

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Weekly Fixed Income LatAm Strategy: The rally in Brazilian rates continues

January 7, 2019

The Brazilian market is becoming more constructive on the reform agenda.

All LatAm: The drop in U.S. rates continues to drive some tightening in LatAm local rates as well, with Brazil and Mexico outperforming last week. The highlight of this week will be the U.S.-China vice-ministerial trade talks started in Beijing (Jan 7-8). Bloomberg reported that Chinese Vice Premier Liu He unexpectedly attended the first day of talks, signaling that China is attaching high importance to the meetings.

Brazil: The rally in local rates continued last week, especially at the long end, as the market becomes more constructive on the reform agenda. The belly of the curve tightened around 10bps while the long-end declined almost 20bps. Rates at the front-end of the curve are not tightening much anymore because the market has already eliminated expectations of rate hikes this year.

We highlight three recent developments: First, President Bolsonaro’s initial popularity numbers are high, with 64% of Brazilians viewing the government as “good” or “excellent”. Second, there was substantial news last week indicating Rodrigo Maia is likely to be reelected as Lower House speaker in early February, with the official support of PSL and other parties. Rodrigo Maia has been supportive of the pension reform. Third, government officials, including the President, indicated last week that the government will try to approve (with some changes) the current pension reform proposal, which already cleared the Lower House commissions and is ready to be voted. If confirmed, this will allow for a much faster process of approval than if they decide to announce an entirely new proposal.

This week, keep an eye on Bolsonaro’s meeting with ministers on Tuesday, which may bring important headlines on the pension reform proposal, as well as inflation and activity data. We expect IPCA inflation (Fri.) to post a 0.20% monthly increase, leading the full-2018 IPCA reading to 3.80%. Industrial production (Tue.), is expected to increase 0.3%, which translates to a 0.2% decline yoy.

Mexico: Local rates tightened significantly last week at the belly and long end of the curve, especially due to lower U.S. yields. In addition, the Banxico minutes suggested that the board doesn’t have yet the mind set on maintaining the tightening cycle going forward.

Chile: The local rates curve flattened last week, with the front-end widening around 5 bps and the long-end tightening around 5bps. The market is currently debating whether the central bank will hike rates again by the end of this month or pause the tightening cycle. In that sense, economic activity and inflation data coming out Monday and Tuesday this week will be important drivers of the front-end of the curve.

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