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COLOMBIA: JP Morgan Rotates Steepener Trade, Amid BanRep Board Change

COLOMBIA
BulletEM BulletEmerging Market News
  • JP Morgan believes that the upcoming change in BanRep’s Board of Directors should prompt a market repricing of a more dovish central bank reaction function after January. However, fiscal and external risks are likely to keep the back-end under pressure.
    • While they retain their preference for curve steepeners in Colombia, they rotate that preference, closing the 1y1y v 5y5y IBR steepener and entering a long COLTES Aug-2026 v 5y IBR payers position. They enter at -42bp, with a +20bp target and review at -95bp.
    • The recent reduction in cuts pricing in Colombia makes receiving spot less expensive, and they think 1y1y forwards might prove suboptimal going forward. This new trade expression also takes advantage of an ASW that is wide relative to history with a positive carry and roll.
    • They also stay UW COP in the GBI EM Model Portfolio. At current levels, COP is not reflecting any material risk premium, while the REER is around its 10-year average. Ahead, carry will continue compressing, while slower global growth and U.S. policies aimed at increasing oil production can exert downward pressure on oil prices, adding widening pressures to the CAD.
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  • JP Morgan believes that the upcoming change in BanRep’s Board of Directors should prompt a market repricing of a more dovish central bank reaction function after January. However, fiscal and external risks are likely to keep the back-end under pressure.
    • While they retain their preference for curve steepeners in Colombia, they rotate that preference, closing the 1y1y v 5y5y IBR steepener and entering a long COLTES Aug-2026 v 5y IBR payers position. They enter at -42bp, with a +20bp target and review at -95bp.
    • The recent reduction in cuts pricing in Colombia makes receiving spot less expensive, and they think 1y1y forwards might prove suboptimal going forward. This new trade expression also takes advantage of an ASW that is wide relative to history with a positive carry and roll.
    • They also stay UW COP in the GBI EM Model Portfolio. At current levels, COP is not reflecting any material risk premium, while the REER is around its 10-year average. Ahead, carry will continue compressing, while slower global growth and U.S. policies aimed at increasing oil production can exert downward pressure on oil prices, adding widening pressures to the CAD.