Over the past few months, Colombian local banks have been facing liquidity pressure, which has pushed medium-term local bank deposit rates (CDTs) well over local bond yields (COLTES) and swaps (IBRs) and a widening in the COP basis (spread between COP FX Forward Implied Yields and similar term IBR rates).
We expect yield spreads to tighten as the country’s financial regulators and administrators (SFC) reverse some of the previous changes that caused funding/liquidity pressure. However, this could weaken the COP, given COP inflows have been motivated by the yield premia. If the proposed legislation is passed, it will likely come into effect on 30 September 2023 and should free up liquidity (and eventually reduce pressure on local margins). Nevertheless, the correction will not be immediate but likely gradually continue through 4Q23 – and may even need additional measures for full compression.
- Local rates: We expect the COP Basis to continue to contract with 12m FX implied yield spreads vs. 1y IBR dropping below 100bp and 12m implied FX yields likely falling below 11.50% (from about 13.40% currently). The CDT vs. TES Yield Spreads should contract to levels closer to 100bp
- FX: We estimate the COP premium, driven by the widening of the COP basis and CDT/TES yield spreads, to be 15-17%, suggesting COP could return to 4400 to 4500 based on normalisation of these spreads.