Sell Peru Long End, Buy Brazil: Lehman

Peru’s 2037s look rich, according to Lehman, which emphasizes its view that the bonds’ outperformance is overdone. It advises selling Peru 2037s versus buying Brazil 2037s. “Brazil has been trading tight to Peru for over six months and the lower spreads are justified, to a large extent, by our belief that Brazil sovereign credit enjoys a better technical position than most of its peers, especially during times of global market uncertainty,” says the shop. “The CDS market seems to share this view as the spread between Peru and Brazil 10-year contracts has trended higher to about +13bp,” it adds. An alternative trade with lower default exposure, though perhaps higher transaction cost, is to buy Brazil basis (10-year CDS with Brazil 2037s) and sell Peru basis (10-year CDS with Peru 2037s). “The difference between these two basis trades has fluctuated between +10bp and -10bp, but it is currently at -38bp,” says Lehman.