A provocative article from the Financial Times’ ‘Beyondbrics’ blog came out a couple days ago, “Brazil: the fixed income trade of year”. All really good, Petrobras scandal, contracting economy, low commodity prices, lost investment grade and whatnot. The market is allegedly factoring interest rates hikes of 300 basis points over the next couple of years (17.25 percent). The author think this is unlikely (“This seems incongruous: it would imply real interest rates of over 10 per cent this year – when gross domestic product is expected to contract by another 3 per cent – and nearly 13 per cent in 2017.”) but as in my opinion fails to understand the structure (or causes) of the Brazilian debt stock and to remember that this is country prone to stagflation.
“Not only is the central bank unlikely to tighten as much as is currently priced, it is likely to start cutting instead as inflation falls and real rates rise.” — Inflation is likely not to spiral out of control, but I wouldn’t say that it will fall anytime soon. The target will continue to be missed by a couple of points above the band for the medium term.
“Despite the challenges the country undeniably still faces, Brazil could well be the best performer among major fixed income markets, developed or emerging, in 2016. Brazil could be the trade of the year.” — Of course, average emerging markets rates at just 2 percent vs. Brazil rates at 14.25-17.25? Why not? The author, however, is taking the lost investment grade too lightly and, although not explicitly, asserting that the political mess will be sorted out soon.
Source: Brazil: the fixed income trade of the year | beyondbrics | FT.com http://on.ft.com/1Waxzv1