Latin Finance - January/February 2011 - 18

local currency investment

us replace exposure to credits we don’t like,” Osses says. He adds that EM currency can substitute for riskier dollar-denominated bonds that are part of external debt indices but that Pimco does not want to own. In normal times, some of the EM currencies that it is bullish on will have high correlation with riskier credits. However, if any of those credits experienced significant stress, Pimco believes local currency would substantially outperform. Because of its scale, high rates and inclusion in BRIC, international investors gravitate naturally towards Brazil. The real had gained about 30% versus the dollar from January to October 2010, making it one of the best performers in the world in that period, according to Nomura. Analyst forecasts generally center around a slightly weaker 1.80 reais to the dollar for year-end 2011, versus 1.72 December 1.

Positive shock, says Ashmore’s Mandeng 2.00% in late 2006. It is an all-time high, the bank says. There are four main types of onshore bonds auctioned regularly in Brazil. The NTN-F (Nota de Tesouro Nacional F) class is a fixed rate bond which goes out to 2021 and had 239.0 billion reais outstanding, as of October. The 11.65% of 2012 NTN-F is the single largest individual NTN-F, with 92.6 billion reais outstanding, according to Brazilian Treasury data. The NTN-B, with a yield linked to ICPA, has a curve extending to 2050 and totaled 357.2 billion reais outstanding,

Getting Serious in Brazil

Investors can get domestic exposure through several classes of government bonds. For those looking to bypass withholding tax or the cost of setting up an onshore security account, global realdenominated bonds and OTC rates and currency instruments are available. “Playing the global products is a nice way to dip your toes, but if you want to be serious, you need Yearly Fixed Income Fund Flows ($m) to have a local account,” says Local currency funds a bigger piece Danilo Simonelli, EM portfolio manager at Ontario Teachers’ 50,000 Pension Plan (OTPP), which Hard Currency EM Bond Funds has $25 billion in fixed income 40,000 assets under management. “It Local Currency EM Bond Funds 30,000 enhances your ability to take advantage of opportunities by 20,000 a dramatic factor. There is a large variety of offerings that 10,000 lets investors pick their sweet 0 spots.” International investors -10,000 held 10.23% of Brazil’s public -20,000 domestic debt as of September 2010, or 154 billion reais out of -30,000 1.51 trillion reais outstanding, 2004 2005 2006 2007 2008 according to JPMorgan. *2010 through 9/30 This is up from 8.02% at the Source: EPFR beginning of the year, and

as of October. Its largest maturity is the 5.62% of 2045, with 51.9 billion reais outstanding, according to the Treasury. Brazil also offers Letra de Tesouro Nacional (LTN) fixed-rate zero-coupon bonds going out to 2013 and totaling 336.9 billion reais. At an auction at the end of November, the Treasury sold 2011 and 2013 LTNs in an interest rate range of 11.76% to 12.34%. Letras Financieras do Tesouro (LFT), a zero-coupon note paying the Selic benchmark rate, total 502.6 billion reais and go out to 2017. They were trading at par to yield 10.75% in November. Foreign accounts held 32.5% of the NTN-F market, as of end of September, or 78 billion reais out of the 239 billion reais outstanding, says JPMorgan. This is up from 22.2% at beginning of the year, it says. “Foreign ownership of local bonds will continue to grow,” JPMorgan says. It estimates that foreign investors only hold about 10% of the local currency government bonds of countries eligible for the GBI-EM index, as of October. In LatAm, the GBI-EM includes Brazil, Mexico, Chile, Colombia and Peru. After Brazil, investors say Mexican and Chilean domestic markets are next highest priority, with Peru and Colombia in a third tier. Whacked harder than others during the crisis, Mexico’s peso is seen as the one currency in the region with the most room to appreciate. Its Euroclearable government bond market is also considered the most welcoming for foreign money, investors say. The government has made a point of bringing the money onshore, a commitment renewed this year through the introduction of syndicated domestic debt auctions raising $60 billion equivalent at five, 10 and 30-year maturities. The government offers Mbonos, fixed-rate bonds, and 2010 inflation-indexed Udibonos, and there is a suite of OTC products, mainly offered to

Peso Appreciation

2009

18 LatinFinance

January/February 2011
Latin Finance - January/February 2011

Table of Contents for the Digital Edition of Latin Finance - January/February 2011
