The title in question is nothing more than a phrase coined over the past year during casual conversations in the office, and its purpose is simply to summarize a view shared by some team members. This view is based, as a starting point, on an economic scenario that, as of today, remains partially true: runaway inflation and, consequently, central banks tightening the money supply, with the real and financial sectors suffering the effects of the latter, alongside an economy on the brink of recession. Under these conditions, the “textbook” strategy is to invest in fixed income, banking on a shift in central banks’ “stance” and the expected reversal in interest rates. Of course,in a scenario of economic fragility, we should always focus on high-quality securities—whether government bonds or investment-grade bonds—prioritizing their strong correlation with each other and steering clear of riskier assets such as high-yield bonds or equities. By this I mean, in Chilean terms, “hopping on the bus.”

A lot has happened since then, and, as always, the market is a source of endless humility. Looking back to the beginning of this year, based on the logic outlined in the previous paragraph, betting on equities—whether domestically (IPSA) or abroad—would have been considered a highly risky move; yet it has more than rewarded “the brave.” To this we can even add the performance of Treasury bonds, the quintessential safe-haven asset—though no less volatile for that.

The broader landscape has also evolved; the world is changing and will never stop changing. It’s now a given that inflation is easing, and at the local level, we have clear signs that rate cuts will begin sooner rather than later. As for the Fed, that’s where we stand: the next rate hike is expected to be the last. The U.S. economy has shown unusual resilience, and it’s no longer a remote possibility that it might even avoid a recession. Not so for Chilito, but those are just details.

With all these cards on the table, rather than wondering when to jump on the bandwagon, it’s reasonable to think that perhaps the opportunity has already passed us by. But not necessarily. Looking at a GT10 near 4%—not only close to a local high but also over a 25-year period—I remain firm in my view that there’s room to benefit from a rate rally. Speaking of “4%,” many might get a little nervous given the asset’s volatility so far this month, but don’t panic; the bus might take a few detours along the way, but it will eventually reach the terminal. Similar to the U.S., the economic outlook for Latin America has improved, though I wouldn’t take an extremely benign scenario on this front for granted—and, above all, I don’t consider it a justification for getting creative in our credit analysis. The focus should remain on seeking investment-grade opportunities in the region, rather than high-yield bonds. No one wants to hop on the bus only to break down halfway there.

Pablo Gallegos, CFA

Assistant Manager, Money Market Desk