Diverging outlook for Lat Am local currency bonds

Local currency government bond markets in Latin America generally came under pressure this month, but we think that most will rally over the rest of the year. In Chile and Peru, while local currency sovereign yields have risen recently in response to the passage of pension withdrawal bills, we expect that central banks will pursue unconventional measures to flatten their relatively steep yield curves. In Mexico and Colombia, we anticipate more policy rate cuts than investors are pricing in which, alongside a general improvement in global risk appetite, is likely to bring down local currency bond yields in these countries. However, the recent political turmoil in Brazil – which threatens to derail the fiscal reform agenda – has increased the risk premium on its debt, and this looks set to persist.