Latin America becomes the solution for reducing emerging market debt

Latin America is one of the most important markets in the economy and one that is making its mark on the international scene. In recent times, this region has been characterised by a reduction in interest rate hikes and traders are taking advantage of the purchase of bonds from some countries in the area. As a result, traders are facing a new challenge to solve emerging market debt problems.

Latin America has gone from being overlooked to being one of the favourite places for investors as interest rates have risen following the economic tightening of a year ago. Moreover, many investors have been seeing the potential of the region for years, as is the case of the Federal Reserve, which has been redirecting interest rate hikes since 2018.

Among the South American countries that stand out is Brazil. This contrasts the facts with an upcoming hike in May, which will be the last after thirteen months of raising rates by around 10%. On the other hand, Chile and Colombia have been raising borrowing costs provided by central banks over the past month.

"We expect some Latin American central banks to start slowing the pace of their hiking cycle, as we think they are approaching their final rates," said London-based BNP Paribas Asset Management. The firm expects that, after reaching several upward peaks, more opportunities will be created in shorter maturity debt.

"Curves should start to steepen as inflation slows and central banks begin to consider rate cuts," the firm continues. In addition, due to this issue some groups such as Goldman Sachs recommend betting on investing in short-dated bonds in Brazil and Chile for safe returns.

Despite the good news from Latin America, another emerging market will bring the opposite effect. In the Asian market, central banks are not expected to start raising rates until around the middle of the year. Experts expect this move to affect shorter maturity bonds and is also expected to be able to flatten the yield curve. 

In Europe, many countries have already raised assets due to the Ukrainian conflict. Countries such as Poland, Hungary and the Czech Republic were already at high levels since the pandemic, but the war in Ukraine is causing the economic outlook to turn increasingly negative. This is because Russia is being blockaded internationally, so Putin has declared "a war" on Western powers in raising the price of petrol and gas.

In the wake of these developments, attention has turned to Latin America where yield curves are already beginning to steepen from being below their long-term averages. In the case of Brazil, the short end of its yield curve is inverted, meaning that it has two-year yields more than 70 basis points above the five-year. On the other hand, in Mexico, the two-year spread is around ten basis points below the average. 

Added to this is the fact that these countries have stronger regional currencies, which means that there is more scope to curb rises by helping to eradicate imported inflation. It is worth noting that five of the six emerging market currencies come from Latin American countries and has benefited the enrichment of these nations. 

"The surprising strength of Latin American currencies in the face of geopolitical risk and a hard-line Federal Reserve may allow central banks to tighten monetary policy less than justified by near-term inflation fears," commented Anders Faergemann, manager of PineBridge Investments in London.

Americas coordinator: José Antonio Sierra.