Colombia: local tes and fx update

| Latin America Emerging Markets Research |

Colombia: Local TES and FX update
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The local TES curve saw a rallywith a flattening bias this week. The reaction to the downward surprise in inflation numbers moved rates tighter across the curve (10-28bp) on Monday and Tuesday. The tone shifted back in the latter partof the week as focus changed to the supply increase through primary auction and the release of the BanRep minutes.

The minutes released this morning emphasized the concerns of increasing inflationexpectation, the anticipated return to near capacity in the second half and the inconstancy that could result from maintaining exceptionally low rates for a prolonged period which lead to thesurprise hike on 25-Feb. J.P. Morgan current forecast calls for a 25bp pace to the cycle with a terminal policy rate of 5.00% (Current repo rate: 3.25%).

Although there is nothing materially differentfrom the BanRep statement, the message remains positive for long-dated TES and neutral for the front end. In the model portfolio, we hold the Nov’13, Oct’15 and Jul’24 underweighting the belly and havemoved our duration exposure to neutral vs. the GBI on the back of the perception that the central bank is moving ahead of the curve.

Buy local TES Jul'24 FX hedged (3-month NDF). Target: 8.25%;Stop: 9%. The slope in the back end of the curve has moved favorably to our recommendation of moving further down the curve. The distortion in the long end between the ‘20s and ‘24s (Table 1) is driven bytechnicals and should correct to historical spreads closer to 30bp vs. the current spread of 47bp.

USD/COP trading weaker than suggested by historical relationship to commodity prices and BRL. Therecent increase of oil prices (+22%) is supportive for terms of trade in most of the Latin countries with Colombia the main beneficiary. Coupled with dollar weakness and sentiment for commodity...