BNY’s EMEA Macro Strategist Geoff Yu highlights that Latin American sovereign bonds remain the best-held global segment, with holdings still about 14% above their 12‑month average and no underheld currencies in the region. Despite modest trimming and reduced short utilization, he warns that limited FX and rate hedging leaves LatAm fixed income vulnerable to a sharp pullback if Fed or financial conditions shift.

Limited hedging leaves bonds exposed

"Even though LatAm is arguably the least economically exposed region to the current conflict, markets have not shied away from adjusting policy expectations. In the run-up to this week’s Selic Rate decision in Brazil, the initial consensus of a 50bp cut swiftly shifted to 25bp – even from a high 15% starting point."

"... LatAm is currently the only region without any underheld currency. Fixed income holdings have declined by less than 2pp, which is not significant and simply reflects a global repricing of inflation risk."

"In absolute terms, current holdings remain around 14% above the rolling 12-month average and are slightly higher year to date. Most surprising is that short utilization for the region’s debt has been falling."

"However, we believe the lack of movement in hedges reflects the view that there will be close to no direct tightening in financial conditions through the dollar or U.S. rate channel, which will significantly affect Latin American asset holdings. While this is our base case for now, lack of positioning for the opposite is increasing asymmetry and will render LatAm assets – especially fixed income – highly exposed to a sharp pullback if alternative scenarios for the Fed or broader financial conditions are realized."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)