Latin American Bond Markets

How are regional banks like Itaú Colombia contributing to the expansion of bond markets across Latin America?

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Bonds are often endorsed as a low-risk form of investment which provide you with steady income revenue, especially in Latin America.

International investors and asset managers are “attracted by the region’s high interest rates, low inflation and more resilient economies than many had expected,” noted the Financial Times in July, 2023.

Simply put, a sovereign bond is a security issued by a government in exchange for a sum. The holder is promised to receive a fixed number of periodic interest payments, before the repayment of the bond’s original value upon its maturity date.

Sovereign bonds can support government spending during the times of high economic activity, especially in developing economies. After all, it was securities such as sovereign bonds that helped rebuild the economies of Western Europe after WWII.

However, sovereign bonds are not a good investment vehicle everywhere. Above all, the issuing state must enjoy a certain degree of political and economic stability, so as to reassure the bond holders that their original investment is in safe hands.

Secondly, bonds make more sense in a country with reasonably good economic prospects, where public spending is expected to bear fruit soon. These two enabling conditions are increasingly available in certain parts of Latin America.

Colombia, for instance, has a reasonably good economic outlook, with moderate but steady economic growth forecasted for 2023-2025. The probability of defaulting—that is the government failing to repay—is calculated to be extremely low at 2.49%, indicating a good credit rating.

Sovereign bonds, as such, are seen as a popular form of mid-term investment in Colombia. The government’s ten-year bonds come with a yield of roughly 10.3%. The yield is relatively smaller for short-term domestic bonds, such as those offered by Itaú Colombia maturing in 2025.

Chile has a roughly similar situation. Although the ten-year yield rate is just 5.4%, the Chilean peso is a slightly harder currency than the Colombian peso, and the risk of defaulting is marginally smaller at only 1.12% in 2023.

Incidentally, it is also possible to acquire bonds in both Colombia and Chile in international anchor currencies such as the US dollar and the euro—a service that banks such as Itaú Colombia have offered in recent years.

Aside from such macroeconomic considerations which are determined by central banks and the economic policies of the issuing government, regional banks may also play a role in supporting sovereign bond issuance.

Joint efforts between a country’s central bank and regional banks is becoming more commonplace in the LATAM region.

In Chile, for instance, a joint consortium of regional banks, including Itaú, have helped the country’s treasury to sell USD2 billion worth of bonds in anchor currencies. The offering was received enthusiastically, with demands exceeding the available bonds by over five times.

If the successful history of sovereign securities in Europe in the second half of the 20th century is any indication, bonds can play a critical role in ramping up economic growth in the LATAM region, too, as long as they are distributed wisely and by the right financiers.