Bloomberg Línea — Brazil and some other Latin American countries present opportunities for gains in the interest rate market, according to analysts at Bank of America or BofA (BAC), one of the largest financial institutions in the United States.
Despite the rise in US Treasury bond yields, which has led to a dismantling of carry-trade operations, the bank sees distortions in the yield curve in the region.
The most obvious distortion occurs in Brazil, where DI contracts maturing in the next few years currently have yields above the Selic projection. BofA’s expectation is that the central bank’s cycle of cuts will end when the reference rate reaches 9.5% per year, with a downward bias.
“In this context, we like to receive DI Jan-27 (currently at 10.85%) to unwind the recent sell-off and position ourselves for a potentially lower terminal rate,” said the bank in a report signed by Christian Gonzalez and Antonio Gabriel.
The difference between market interest rates and the lower expectations of reference rates is a factor that can “unlock value” in Latin American markets.
For the analysts, the pricing of final rates in Latin America is “clearly dislocated”, which opens up opportunities to unlock value in the region selectively.
“We strongly believe that the best way to unlock value in this challenging environment is to be selective in choosing interest receipt positions or favor relative value operations,” the BofA analysts say.
“In Brazil, we prefer direct interest receipt positions, since the curve has one of the most obvious distortions of terminal rates in Latin America,” they point out.
“In Mexico, we prefer the risk-reward ratio of interest receipt positions in relation to US rates in order to position ourselves in anticipation of a repricing of Mexico’s terminal rate without exposure to US rates.”
“In Colombia, the curve is pricing a loosening cycle that is too early, but also too shallow, leading us to prefer ‘flattening’ operations.”
One point of attention, however, is the exchange rate, according to the bank’s analysts. The change in the market over the last month has caused most Latin American currencies to lose value against the dollar, reducing the gains seen in 2023.
A wider devaluation could make total bond returns less attractive, according to BofA analysts. For them, the Mexican peso and the Colombian peso could underperform in a risk-averse scenario compared to other currencies, such as the Brazilian real, the Chilean peso and the Peruvian sol.
