The Attractiveness of Colombian Bonds

Often when global investors think about high yielding Latam debt, Brazil is the first country to come to mind.  And for good reason.  Brazil’s local currency debt offers among the highest yields in the world.  On a 2-year local currency bond, Brazil pays a little more than 12%.

Colombia has the same credit rating as Brazil at BBB- by S&P.  Its 2-year yield is 5%.  However, the Colombian peso is the strongest Latam currency this year, gaining 7.4% against the dollar.  By comparison the Brazilian real is off 2.6% year-to-date.  That suggest that on a total return basis two returns are roughly comparable.

Volume data is difficult to ascertain, but anecdotal evidence would suggest Brazil is a crowded trade.  In addition the finance ministry in Brazil recently warned the market that the government has tools to limit the currency’s strength.  In contrast, the Colombian central bank has been buying $20 mln a day since March and has confirmed that the program will end this month.

Colombia has a new government, led by former Defense Minister Santos.  He was elected with nearly 70% of the vote so he has a strong mandate.  The economy is expected to grow around 3% this year and 4% next year.  Direct investment inflows are robust.   The equity market is up about 7.7% this year, while the Brazil’s Bovespa is off about 5.6%.

Brazil’s national election is later this year and recent polls show Lula’s hand picked successor Dilma Rousseff has closed the initial gap with the opposition’s Serra, though the official campaign does not begin until next month.  The political uncertainty would seem greater in Brazil than in Colombia, even though the difference between the candidates may be modest.

The risk of local currency investment in Colombia immediately is that the currency has rallied since early May and there is scope for a near-term correction that could see the dollar rise toward COP1930-50 from the current COP1900 area.  Earlier this week the dollar tested its lows for the year near COP1878.