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After the COVID-19 pandemic, the world faced a supply chain disruption that led to unprecedented levels of inflation. In response to the rapid increase in prices, central banks were forced to raise interest rates to historic levels to mitigate inflationary effects.
Latin America was no exception to this global trend. Countries like Brazil, Chile, Colombia, and Mexico raised their benchmark rates, often reaching double digits. This adjustment attracted investment flows into fixed-income instruments in emerging markets, with Latin America being a significant destination.
However, as inflation begins to moderate globally and with expectations of Federal Reserve (FED) rate cuts in the short term, alongside a gradual reduction of interest rates in the region as monetary policies normalize, a valid question arises: Is fixed income in Latin America still attractive?
The answer, when considering a proper balance between risk and return, is yes. Latin American fixed income remains appealing, but it is crucial to carefully select both the country and the segments of the curve that offer the most value.
In this regard, the intermediate segments of the curve in several Latin American countries continue to offer attractive interest rates with significant appreciation potential, particularly highlighting bonds in Colombia and Mexico. On the other hand, in a scenario of economic slowdown with more moderate growth, fixed income in countries like Chile provides additional protection to investment portfolios due to its lower volatility compared to other nations in the region.
Moreover, considering that, in theory, Latin American currencies tend to depreciate due to the narrowing of the interest rate differential with the United States, corporate bonds in U.S. dollars from Brazil, Chile, Colombia, Mexico, and Peru represent an interesting option. These instruments benefit both from the exchange rate effect and from a potential decrease in U.S. Treasury bond rates.
In summary, the normalization of monetary policy in the region does not eliminate the attractiveness of Latin American fixed income. On the contrary, it encourages a shift from the short end of the curve to a more balanced and diversified strategy, taking advantage of the various opportunities offered by fixed-income assets in the region.
