Colombia Yield at 5-Year High, Morgan Stanley Cuts Bonds to Hold

  • Bank removes buy recommendation, citing issuance risk
  • Local rates less attractive than Mexico's, bank says

Morgan Stanley cut its buy recommendation on Colombia’s local bonds, saying that the possibility of additional issuance and the increased cost of hedging currency risk made Mexican notes more attractive by comparison.

The yield on benchmark government peso bonds due 2024 rose 0.06 percentage point to 8.78 percent at 10:33 a.m. in Bogota, the highest since 2011. Colombia’s domestic notes have lost 7.4 percent this year, the worst performance after Russia among emerging-market sovereigns, according to data compiled by Bloomberg.

Morgan Stanley cut its recommendation on local rates to market weight from overweight as it said that Colombia’s bonds no longer look as attractive on an currency-hedged-return basis. There’s risk of additional issuance amid an expected deterioration in fiscal accounts, while rising inflation expectations may lead to more monetary tightening than what’s priced in, and the currency may weaken further, the report said.

“Given the combination of high yields and a steep curve, Colombia remains interesting from a total-return perspective, but it is by far not the best performer anymore,” analysts led by Gordian Kemen said in the report dated Feb. 9. “From a fixed income perspective, the key issue in Colombia is the risk of fiscal under performance and hence the risk of further supply.”

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