Contagion Effect: Which Latin American Economies Are Most Exposed to Rising Rates in the US

US Treasury yields surged again this Wednesday to reach levels not seen since 2002, driven by rising oil prices and fears of persistent inflation. This dynamic tightens the international financial landscape and increases the vulnerability of Latin American economies.

The 10-year Treasury rate surpassed 5.30%, while the 30-year rate reached 5.72%, marking its highest level since 2002. New Iranian attacks in the Strait of Hormuz pushed Brent crude above $101 per barrel and reinforced expectations that the Federal Reserve will maintain a restrictive monetary policy.

This level keeps the pressure that Citi is analyzing for the region. Latin American governments finance themselves in local currency and dollars, and their curves directly or indirectly reference US rates, although the magnitude of the transmission varies significantly between countries.

Colombia, Brazil, and Mexico Feel the Greatest Impact

According to a Citi study with a 24-month analysis horizon, Mexico, Colombia, and Brazil are the economies in the region that experience the highest and most lasting transfer of US rates to their 10-year sovereign bonds issued in local currency.
Mexico, Colombia, and Brazil are the economies in the region that experience the highest and most lasting transfer of US rates to their 10-year sovereign bonds issued in local currency.

The study details that for every increase of 100 basis points in the US 10-year Treasury bond, yields in Mexico, Colombia, and Brazil increase between 100 and 170 basis points, with an impact that accumulates in the first year and persists into the second.

In contrast, Peru experiences a milder transmission, supported by its greater fiscal solidity and lower level of indebtedness, while in Chile and Costa Rica the transfer is significantly lower and statistically less conclusive.

In Chile, internal factors weigh more than US rates in the formation of the curve. Its estimated response is just 0.1 percentage points, while the confidence bands cross zero for prolonged periods in the second year.

The Internal Bill

Colombia and Brazil stand out because their residual component remains high and positive, currently between 4 and 7 percentage points. The report links this to internal conditions such as fiscal deterioration, inflation expectations, and local market liquidity.
Colombia and Brazil stand out because their residual component remains high and positive, currently between 4 and 7 percentage points.

Chile shows the opposite behavior. Its residual component recently turned negative, meaning that the yield on its 10-year bond is below what would be suggested jointly by the US rate, the term premium, and its own CDS differential.

"Colombia and Brazil emerge as the most exposed among countries with reliable data on local yield sensitivity," affirm Revilla and Juncal.

Peru and Chile Show More Resistance, with Argentina as a Different Case

According to the study's metrics, Peru ranks as the country with the lowest contagion risk, scoring only 21 points out of 100 due to its moderate sensitivity to external rates, a current account surplus, and the lowest public debt ratio in the sample (28% of GDP).
Peru and Chile show greater resistance to contagion due to fiscal and debt factors.

On the other hand, Chile scores 43 points driven by a minimal response of its sovereign curve and a debt at intermediate levels, while Mexico is close to the regional average, cushioning the strong reaction of its local rates with a controlled level of indebtedness.

Argentina requires a different reading. Its score of 93, the highest in the sample, primarily responds to external liquidity tensions and not to the transmission of long-term rates, as it lacks a comparable curve of yields in local currency.

Citi warns that higher US rates may incentivize a reallocation from higher-risk sovereigns to safer assets with more attractive yields, a relevant variable for Argentina in an election year and for its stabilization efforts.

This content is provided for general informational purposes only and doesn't constitute financial, investment, legal, or tax advice. Any events, rewards, online promotions, or related information mentioned herein should not be considered a recommendation, solicitation, or invitation to purchase, sell, trade, or otherwise deal in any crypto assets. Crypto assets are highly volatile and may result in loss. The availability of WEEX services, products, and related events may vary by region. You are responsible for ensuring that your participation is in accordance with applicable local laws and regulations.