NEW YORK — Four analysts at Bank of America are flagging risks to investors seeking alpha in Latin America.

“We turn increasingly cautious on LatAm fixed income markets given the intensification of both global and local risks,” analysts Jane Brauer, Gabriel Tenorio, Lucas Martin, and Claudio Irigoyen wrote in a recent report to clients. A fast rise in U.S. rates and growing doubts about China’s and commodities’ market outlook “are concerning” for Latin America, a region that “is dependent on external financing and highly exposed to raw materials”, they added.

Local risk are also plenty as “fiscal and political noise continues across the board, driving further volatility in currencies, yield curves and credits that were already trading cheaply to begin with,” the analysts stated in the report dated September 30. The bank is reducing risk exposure in its Latin America fixed income portfolio, “closing some of our outstanding trade recommendations,” they said.

Five Plays Closed

The analysts closed their long MXN, COP basket against CLP entered on 22 September at 100 and exit at 102.4. “The move was largely driven by CLP underperforming COP as political noise intensified as Chile’s elections approach, oil prices outperformed metal prices, and Colombia’s BanRep started its hiking cycle. MXN/CLP remained largely unchanged since entry.”

The analysts argue that the Chilean peso “will likely remain under pressure driven by local politics.”

BofA also ended a short USD/COP against pay Colombia’s 10y IBR entered on 3 June. The bank entered at 100 exiting at 117, the said in the report. “10y IBR increased since we entered the trade, driven by the re-pricing of an earlier and faster hiking cycle than previously expected. COP depreciated 4.2%, but the trade profited positively given beta-neutral weights we chose.”

Also in Colombia, Bank of America ended a long TES UVR 23 play, an inflation linker, entered on 16 March. “The P&L impact of higher real yields was more-than-offset by the increase in the consumer price index, which has accumulated 2.9% rise in Feb-Aug. Looking forward, we now prefer to be long the TES UVR 33 tenor.”

They also exit a Peru-Colombia local bond strategy, closing Peru’s Sob 31 against long Colombia’s TES 32 entered on 22 September. “Peru’s local yields sold off in recent days amid radical measures pursued by some members of the Castillo cabinet, while Colombia’s have remained relatively stable in spite of the global rates.”

After a recent rally in Argentina’s external debt the bank closed long 38s against short 35s.”We entered the trade on 28 September 2020 at a 5.4 price difference and exit at 5.65 price difference. See Buy 30s and 38s vs. 35s.”