Wednesday, 28 January 2009

IDEAGlobal Says Buy Short-Termed Colombian TES Debt. Translate it If You Can

I won't rewrite this -- I have had a long day! It reads quite clear to me .. but it might not read that clear for some of you. The only thing this blog will say is that there will be at least 250 basis points of monetary policy flexibilisation between the start of Jan. and mid-2009. The situation in Colombia (I just realised it tonight) is bad ... but people don't seem to quite get it.

Try a little harder with the reading ... IDEA kind of makes its point.

''Colombia's TES curve has paralleled most other domestic fixed-income markets in the region in enjoying an accelerated period of yield compression underpinned by the expectation of additional larger anti-recession rate cuts to come. In examining the shape of the TES curve, the described compression has also moved the spread between short and long-duration paper back to the edge of its prior "normal" trading range observed during the course of nearly 1 ½ years and that dates back to early 2007. Our particular chart (which we don't show here in MM) example isolates the spread of the 2010 TES and that of the 2020 TES. We're now holding differentials between these credits that were last observed in mid-2008. What's interesting about current levels is that the 2010 maturity trades with an approximate yield of 9.19 percent, which would be theoretically above the 9 percent levels we target as the official rate after the CB has its say on the matter this coming Friday. In-turn, the 2020 paper stands at 9.77 percent, which would imply a difference of near 75 basis points if the rate cut that we expect materializes. Our impression is that the front-end will need to start adjusting for additional stimulus to come, likely forcing this spread towards some bull steepening ahead. Hence, we would favor playing the 2010 maturity from the long side, while shorting the back end in expectation of shorter-duration paper leading market psychology towards more rate reductions ahead.´´

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