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Morgan Stanley on Peru: Prefer Buying PeruGB Aug 2032s Vs UST May 2032s

PERU
  • MS economists expect another 25bp hike to 7.00%. Policy-makers will remain attentive to new information, including economic activity data and inflation expectations, to decide the next monetary policy steps. Food inflation continues to keep headline inflation elevated while fuel prices are showing some signs of relief, due to lower international oil prices.
  • Looking at forward-implied yields in PEN shows the market pricing a 25bp hike at the upcoming meeting followed by a chance of one more 25bp hike. MS economists are calling for a last hike in this next meeting as real rates ex ante (rates minus inflation expectations 12 months ahead) would be far into the contractionary side, nearing 2%.
  • MS continue to prefer buying PeruGB Aug 2032s versus UST May 2032s as growth remains weak in Peru while US data remain resilient. The yield spread remains elevated on a historical basis.
  • For PEN, BCRP FX swaps maturities are expected to accelerate, which is likely to add some pressure to the currency during the month of October, especially as the BCRP winds down its hiking cycle.
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