Itaú BBA - Weekly Fixed Income LatAm Strategy: We continue to receive long-term real rates in Brazil

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Weekly Fixed Income LatAm Strategy: We continue to receive long-term real rates in Brazil

January 14, 2019

Approval of the pension reform will be an important trigger for lower long-term rates.

All LatAm: Latam rates stopped falling last week, in tandem with U.S. rates, which stabilized after a strong rally in previous months. Nominal rates widened slightly in Brazil, Mexico and Chile, and tightened slightly in Colombia (see charts).

BRAZIL: Nominal rates at the belly of the curve widened last week, but long-term real rates continued to decline slightly. As the repricing of global rates has already gone a long way, we believe that progress on the domestic reform agenda is required for further tightening in Brazil.

Over the weekend, O Globo reported that the government’s social security reform proposal will be more ambitious than the one currently in Congress (worth 1.4% of GDP by 2027), will be presented in the first week of February, and should see a first vote in the Lower House in March, after Carnival. This schedule indicates the government will use the reform currently in Congress, and implement changes to the existing version, in order to have a faster approval process in Congress. Another report in O Globo indicates the government will pursue fiscal adjustment in other fronts, such as freezing civil servant wages in real terms, tightening conditions for the year-end bonus for low-wage workers (“abono salarial”) and increasing the minimum wage only in line with inflation. These are necessary measures in order to respect the expenditure ceiling over the coming years.

We continue to receive the NTN-B 2050 real rate at 4.64% with a 16bps gain so far. Approval of the pension reform will be an important trigger for lower long-term rates going forward. In addition, the weakness of economic activity in recent months, particularly in the industrial sector and investment, continues to fuel the debate on the neutral interest rate, which in our view has shifted downwards to around 2.5/3.0%, especially because of the ongoing fiscal adjustment.

Discussions around the pension reform and the election for Lower House and Senate speakers will remain the focus of the market this week. On the macro data side, we forecast a 0.9% mom/sa increase for core retail sales (Tue.), a 0.5% yoy increase for service sector revenues (Wed.) and a 0.2% mom/sa increase for the central bank’s economic activity indicator (IBC-Br).

CHILE: Local rates widened last week, including the front-end, as economic activity surprised to the upside early last week, boosting the chances of a rate hike by the end of this month. The market is pricing in 26bps in hikes in the next 3 months and 58bps in 1 year. We expect a 25-bp rate hike to 3.0% by the end of this month and the policy rate to reach 3.75% by yearend.



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