While, in the medium term, the hike in interest rates in the United States could lead to additional volatility, in the short term, the outlook is fairly positive given the spread in interest rates between developed and emerging markets, which grew following the increases in Brazil, Turkey, South Africa, with Japan and Europe destined to remain close to zero for years and with the negative flows to emerging countries recorded over the full second half of 2013. The underweighting is demonstrated by these countries’ minimal reaction to the US Federal Reserve’s announcement of plans to raise rates six months after the end of tapering.
Flows to government bonds in local currency are significant, to the extent that Japanese investments are gradually returning to the long end of the Brazilian interest rate curve. Real returns on these securities are now at around 7%.
Real rates are up nearly everywhere, and this will help the virtuous cycle of new investments. Beyond Brazilian local rates, the most popular fixed income trades are Argentina, Ukraine, Venezuela and Greece right now.