Bond market veteran Timothy Haywood has adopted Brazilian bond positions across his absolute return fund range to capitalise on what he deems a ‘most extraordinary opportunity’.
Citywire + rated Haywood, who runs six funds on behalf of GAM, said the current market outlook for Brazil is dismal, with recession likely in the short term.
‘We believe that the most extraordinary opportunity appears to be in Brazil. Interest rates in Brazil have hither to risen and fallen in large waves,’ he said.
‘The current market pricing for the future path of interest rates is essentially a flat line over the next five years, a pattern of stability not seen in this country.
‘The outlook for the Brazilian economy is currently dismal, with recessions this year and next. If inflation is in the order of around 5–6% next year, the level of real interest rates is extreme compared with other countries.’
Haywood said Brazil could buck the global trend of rising rates by opting to cut rates in the current environment. He said there is a strong likelihood rates and bond yields will drop significantly by 2019, if not sooner.
‘If yields are still super-elevated without a growth spurt, then the risk of financing stress for the government will surely rise, driving default risks up materially from today’s modest level, at a time when long-term interest rates may not rise much further,’ he said.
His comments were echoed by a member of his team, who told Citywire Global: ‘The market is currently pricing interest rates in Brazil to remain within a tight band until at least 2020, a situation that we consider to be totally implausible based on the historic volatility of interest rates in Brazil and the economic backdrop.’
Meanwhile, Haywood and co-manager Daniel Sheard have taken a short position against the Brazilian real, while owning significant CDS protection against further credit deterioration.
The threat to this positioning, Haywood said, would be if there was a rapid recovery in the Brazilian economy and the political landscape. In addition, Haywood raised concern of a domestic crisis emerging which is not currently priced in.
He pointed to Petrobras as an example of previous idiosyncratic risk emerging. However, he said it has become more encouraging. ‘The credit spread of Petrobras has started to widen dramatically relative to the sovereign, but we are not yet tempted to buy their bonds.’
The funds overseen by Haywood are the GAM Star Absolute Return Bond Defender, GAM Star Dynamic Global Bond, the Julius Baer BF Absolute Return Plus, GAM Star Absolute Return Bond, Julius Baer BF Absolute Return Defender and Julius Baer BF Absolute Return.