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BNY favors Latin American duration over carry after Fed decision

BNY said Brazil and Mexico face a more comfortable policy environment as the Fed outcome leaves US front end yields more anchored and improves the region's inflation outlook via the import channel.

Reported · Written up by our desk · EM Currencies

FXStreet cites Geoff Yu at BNY arguing that Latin American sovereign debt has a better risk reward than FX exposure, with a view that duration is favored over carry for Brazil and Mexico after the Fed decision.

Yu said Brazil and Mexico are likely to see central bank moves in a slightly more comfortable policy environment, pointing to anchored US front end yields and weaker US real yield dynamics after the breakout in US breakeven rates undermined the case for US real yields.

BNY also linked the shift to softer US real rates and Dollar weakness, saying it should improve inflation through the import channel for regional assets.

Yu added that asset selection remains challenging, noting that the global carry trade has made little headway amid cross asset volatility and difficult geopolitics, and that Latin American paper performed poorly through end June and early July, creating potential rebalancing toward month end.

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