Chasing yield

Posted by Scriptaty | 8:27 PM

With the high overnight interest rates in Brazil (around 19 percent) and Mexico (around 10 percent), de la Fuente says money flows chasing yield may have contributed to the overall strengthening trend in these country’s currencies.

“There have been a lot of people, particularly [those who buy] hedge funds, buying local bonds and currencies,” he adds.

The million-dollar question, of course, is will global investors remain confident in Latin America and will these economies and currencies continue to strengthen?

“If the Chinese decide to revalue and if they stop buying U.S. Treasuries, then U.S. yields will go up,” says de la Fuente. “Some of the bond yield differentials built into these trades won’t be as attractive.”

Nonetheless, global investors “see Latin America as promising over the medium and long term because they still haven’t implemented all the [potential] packages of reforms,” notes Coutino.

Several countries have state owned oil, electricity and banking systems, which are currently restricted to foreign investors.

“It is expected at some point in the future these governments will be forced to open these sectors to foreign investors,” Coutino says. “The state-owned oil company in Brazil, Petrogras, was a monopoly but now it is open to foreign investors.”

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