We believe Colombian USD 5Y bonds could work as a good defensive position along the Colombian USD curve for several reasons: i) the move in Colombian 5s10s is lagging the recent steepening seen in the UST 5s10s, so there may be some catching up to do; ii) in spread terms, Colombia 5s10s have continued to flatten at a more rapid pace than other LatAm peers, making Colombian 5Y bonds appear cheaper; iii) if Colombia decides to issue in the primary market, given current market conditions, we would expect the new issuance to come in the 7Y or 10Y area, which could drive some 5s10s steepening; and iv) given the current high volatility in the market, lower duration reduces some risk.
The performance of LatAm USD bonds has been driven primarily by UST moves and political factors. We think many investors agree that Colombian USD bonds look relatively cheap compared to peers, but political uncertainties surrounding the presidential elections and the probability of new issuance (budget has USD3.2bn in external bond financing) have kept investors on the sidelines. In the short term, the recent spike in oil prices should provide some support to economic activity, and in turn help the fiscal and current account deficits, though in the medium term, the new government is left with the task of addressing longer-term challenges. Given the current uncertainties and some of the technicalities along the curve (mentioned above), we believe that a defensive position in Colombian 5Y bonds is preferred and could benefit from a 5s10s steepening, making 10Y bonds less attractive.