While many investors are opting for strategies that profit from falling interest rates, fees at Latin Americasome big banks are warning that it is too early to declare victory in the fight against inflation.
Bank of America said rates in the region could remain high for longer than markets expect and so it is worth holding positions that benefit from a rate hike in countries such as Mexico and Chile.
O Goldman Sachs Group Inc. said investors should be selective when adding positions applied to interest rates – which profit from a drop in rates – as inflation has yet to peak in many emerging markets.
Bets on falling interest rates gained strength after the inflation data of United Stateswhich came below expectations and fueled hopes of a less aggressive tightening than Federal Reserve.
Latin America has been the most popular destination for these bets, as banks Centrals in the region were the first to start raising rates and may be the first to consider cuts, Brazil being the main example.
“The market is pricing in a lot of cuts very quickly,” BofA analysts Claudio Irigoyen and Cristiano González Rojas wrote in a note this week. It is worth, according to them, to use possible drops in interest rates in the region caused by external factors to bet against this movement.
Interest rates in major developing economies have been on a downward trend since late July, when fears of a global recession rose.
It is the opposite of the prevailing mindset in the first half of the year, which focused on interest rate hikes due to rampant inflation.
Some of the biggest declines were seen in Latin America, where the monetary tightening cycle is at a more advanced stage in many countries.
DI rates in Brazil due in January 2025 have dropped more than 180 basis points since peaking late last month.
In Chile, the two-year rate has dropped 70 basis points since the mid-July high, while Colombia’s same-maturity IBR rate has fallen by around 120 basis points over the same period.
In Mexico, two-year TIIEs dropped 65 basis points last month.
Still, inflation in these countries remains at multi-year highs, well above the central bank’s target and has only begun to decline in Brazil.
For BofA, the recent moves open an opportunity in Mexico, which is not expected to reduce the interest spread against the United States anytime soon, and in Chile, where inflation continues to accelerate.
In Colombia, the bank recommends betting on a flatter curve, as markets are betting on cuts too soon.
Others, including Barclays and BBVA, also warned against rash bets on lower Mexican rates.
“Inflation needs to peak for a more sustained and broader rally in emerging market local rates,” Goldman analysts, including Kevin Daly and Tadas Gedminas, wrote in a note this week. “While we expect inflation in Latin America and CEEMEA to peak in the coming months as a result of basic effects on energy and food prices, it is likely to remain higher for longer than previously seemed likely.”
Brazil appears to be the exception, where most agree that the drop in rates is justified given the recent indication from the central bank.
After raising rates by 11.75 percentage points since the start of 2021, the BCB has signaled that the cycle may be over and traders are lowering their bets on a final rise in the price. Selic In September.
“Countries like Brazil and Mexico, particularly the former, appear to be further along the rate hike cycle than emerging ones in general,” said Todd Schubert, head of fixed income research at Bank of Singapore.
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Source: Moneytimes
I am an author at Global happenings and I mostly cover automobile news. In my time working in the automotive industry, I have developed a keen interest in the latest developments and trends. My writing skills have also allowed me to share my knowledge with others through articles and blog posts.
