Fixed Income and Currency Strategist

Gautam Jain, PhD, CFA

FX & Rates

Colombia's central bank started its monetary tightening cycle last week. The rate hike was in line with our expectations and supported our 2s5s flattener recommendation. We expect the curve to flatten further towards its historical norm on the back of a likely acceleration in the pace of rate hikes with inflation continuing to increase. Despite our expectations, we recommend closing the trade as the high negative carry may cancel the gains if the flattening is gradual.Separately, the attached file is a snapshot of the EM 10y rates market in which we seek to identify the leaders and laggards among countries by comparing the performance of each to its history as well as to other countries based on their respective betas to an EM rates index.

Colombia's central bank started its monetary tightening cycle last week. The rate hike was in line with our expectations and supported our 2s5s flattener recommendation. We expect the curve to flatten further towards its historical norm on the back of a likely acceleration in the pace of rate hikes with inflation continuing to increase. Despite our expectations, we recommend closing the trade as the high negative carry may cancel the gains if the flattening is gradual.Separately, the attached file is a snapshot of the EM 10y rates market in which we seek to identify the leaders and laggards among countries by comparing the performance of each to its history as well as to other countries based on their respective betas to an EM rates index.

Rates 10y Dashboard: Take Profits on Colombia 2s5s Flattener

The upside inflation surprise in Colombia reinforces our expectation that the central bank should start its monetary tightening cycle at the next MPC meeting at the end of the month. With the pricing of rate hikes increasing, our trade recommendation for a 2s5s flattener in Colombia has worked well. We recommend holding the trade as we see room for further flattening.Separately, the attached file is a snapshot of the EM 10y rates market in which we seek to identify the leaders and laggards among countries by comparing the performance of each to its history as well as to other countries based on their respective betas to an EM rates index.

The upside inflation surprise in Colombia reinforces our expectation that the central bank should start its monetary tightening cycle at the next MPC meeting at the end of the month. With the pricing of rate hikes increasing, our trade recommendation for a 2s5s flattener in Colombia has worked well. We recommend holding the trade as we see room for further flattening.Separately, the attached file is a snapshot of the EM 10y rates market in which we seek to identify the leaders and laggards among countries by comparing the performance of each to its history as well as to other countries based on their respective betas to an EM rates index.

Rates 10y Dashboard: Colombia’s Rate Curve Should Continue to Flatten

With the Fed turning hawkish, the pressure on EM central banks to do the same has increased. In this note, we identify the countries where 2s5s slopes can flatten as rate hikes get priced in earlier than before.Separately, the attached file is a snapshot of the EM 10y rates market in which we seek to identify the leaders and laggards among countries by comparing the performance of each to its history as well as to other countries based on their respective betas to an EM rates index.

With the Fed turning hawkish, the pressure on EM central banks to do the same has increased. In this note, we identify the countries where 2s5s slopes can flatten as rate hikes get priced in earlier than before.Separately, the attached file is a snapshot of the EM 10y rates market in which we seek to identify the leaders and laggards among countries by comparing the performance of each to its history as well as to other countries based on their respective betas to an EM rates index.

Rates 10y Dashboard: Which EM Countries to Target for 2s5s Flatteners?

In this week’s Alpha Bites, we recommend receiving the 5-year rate vs paying the 2-year rate in Colombia while keeping a slight receiving bias. Despite the recent flattening, Colombia's 2s5s curve slope is currently the steepest among liquid EM countries. The steepness was driven by the risk of potential rating downgrades to below sub-investment grade. With S&amp;P already downgrading Colombia but leaving the local debt above investment grade, we see this risk as low for now and the long end should continue to move lower. Meanwhile, the short end should feel the pressure from rising inflation.

In this week’s Alpha Bites, we recommend receiving the 5-year rate vs paying the 2-year rate in Colombia while keeping a slight receiving bias. Despite the recent flattening, Colombia's 2s5s curve slope is currently the steepest among liquid EM countries. The steepness was driven by the risk of potential rating downgrades to below sub-investment grade. With S&amp;P already downgrading Colombia but leaving the local debt above investment grade, we see this risk as low for now and the long end should continue to move lower. Meanwhile, the short end should feel the pressure from rising inflation.

Alpha Bites: A 2s5s Flattener in Colombia with Receiving Bias

Colombia

A vanila interest rate swap us an agreement between two counterparties to exchange cashflows (fixed vs floating) in the same currency. This agreement is often used by counterparties to change their fixed cashflows to floating or vice versa. The payments are made during the life of the swap in the frequency that is pre-established by the counterparties.

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Rates 10y Dashboard: Take Profits on Colombia 2s5s Flattener

We recommend taking profits on our 2s5s rate curve flattening recommendation in Colombia. We expected the short end to move higher as the central...

Gautam Jain, PhD, CFA

Rates 10y Dashboard: Colombia’s Rate Curve Should Continue to Flatten

The upside inflation surprise in Colombia should lead to the central bank raising the policy rate at the next MPC meeting, which should continue to...

Gautam Jain, PhD, CFA

Rates 10y Dashboard: Which EM Countries to Target for 2s5s Flatteners?

With the Fed turning hawkish, we identify the EM countries where 2s5s slopes can flatten as rate hikes get priced in earlier than before.

Gautam Jain, PhD, CFA

Alpha Bites: A 2s5s Flattener in Colombia with Receiving Bias

We recommend a flattener in Colombia as the long end should continue to rally with the risk of a downgrade to sub-investment grade diminishing even...

Gautam Jain, PhD, CFA

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