20180226-法国巴黎银行-LATIN_AMERICA_STRATEGY__New_changes_to_Brazilian_pension_fund_investment_rules__strategy_and_implications_10页_367kb

Summary of the LATIN AMERICA STRATEGY Document

Core Content

This document outlines the new changes to Brazilian pension fund investment rules introduced by the CMN (National Monetary Council) on 23 February 2018, and analyzes the implications for interest rate dynamics and investment strategy in the Brazilian fixed income market.

The changes were made to address a distortion in the interest rate curve, which had caused it to steepen and the NTN-F bond basis (bond YTM - DI interest rate) to reach record negative levels. The immediate effect was a sharp flattening of the DI curve, which impacted the behavior of pension funds and insurance companies in the secondary market.

Main Points and Key Information

Regulatory Changes

• The CMN modified the risk duration requirement for pension funds and insurance companies:

  • From 30 September 2018, the risk duration will be reduced from 730 days to 548 days.
  • From 31 March 2019, it will further decrease to 365 days.
  • From 30 September 2019, it will drop to 183 days.
  • Finally, from 31 March 2020, the requirement will be eliminated (reduced to zero).

• These changes were implemented to support the existing strategy of receiving rates in the "belly" of the curve (FRA Jan-20/Jan-21), with an original target of 9.75% and an allocation of USD 50k DV01.

• The PnL of this strategy is currently 40bp positive, indicating that the strategy is performing well under the new regulations.

Market Impact

• The immediate flattening of the DI curve was due to the reduced demand for long-term fixed-rate bonds (NTN-Fs) and the increased use of interest rate swaps to receive rates, thereby reducing the bond basis (which moved from very negative to almost flat levels).

• The market-makers who had previously sold NTN-Fs and received DI on a DV01 neutral basis saw their portfolios flatten, leading to a need for adjustment.

• The new rules are expected to support the current strategy by reducing the risk duration requirement, which will allow pension funds and insurance companies to adjust their portfolios more easily.

Strategy Implications

• The strategy remains focused on the belly of the curve, with a target rate of 9.75% and an entry point of 10.60%.

• There is a potential for reduced demand for long-term NTN-Fs, especially in a hiking interest rate environment, which could lead to excess supply and curve steepening.

• The term premium in the Brazilian DI curve is still abnormally high, which could continue to support the current strategy.

• The bond basis (NTN-F vs DI) is expected to move towards less negative or positive territory, but this is influenced by other market variables such as low funding costs for banks and credit demand.

Trader's View: Caveats

• Pension funds and insurance companies are not required to sell back their NTN-F+DI positions immediately. They have a 90-day window to adjust their portfolios.

• The decay of existing portfolios will be gradual, and the impact of unwinding will be minimal.

• There may be a lack of demand for long-term NTN-Fs in the future, especially during a rising rate environment, which could reduce the attractiveness of these bonds.

• The CMN's changes are unlikely to have the market's intended effect, and may lead to curve steepening if the supply of NTN-Fs remains high.

Legal and Regulatory Disclaimer

• This document is a marketing communication and not investment research under MiFID II.

• It is not intended for retail investors and is only directed at Relevant Persons as defined by regulatory frameworks.

• The information is based on public sources and may not be independently verified.

• BNPP may have conflicts of interest and may engage in transactions inconsistent with the views expressed in this report.

• The indicated prices and terms are preliminary and not binding.

• The document does not constitute a prospectus, and transactions must be made through BNPPSC for U.S. persons.

• The document may include performance data based on back-testing, which is not indicative of future results.

• The content is confidential and must not be copied or distributed without prior written consent.

Conclusion

The regulatory changes in Brazil are expected to flatten the DI curve and reduce the risk duration requirement, supporting the current strategy of receiving rates in the middle of the curve. The impact on the bond basis and market dynamics is significant, but the effect may not be as strong as anticipated. The strategy remains viable, and the term premium continues to be a key factor in the market. Investors are advised to seek professional advice and understand the risks associated with these instruments.