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LATAM: Issuers and investors get a taste for local debt

Latin America’s local-currency markets are no longer a sideshow for esoteric investors. Today, many emerging market portfolio managers have exposure. But, as Felix Salmon reports, the growth of domestic supply and demand will drive these markets forward.

    ... more on Latin America

YOU WANT HIGH returns with little to no risk? It’s easy. Just buy Brazilian reais. Overnight interest rates are north of 17% and the currency only ever seems to get stronger. If you’re a dollar investor, you’re making high nominal returns from Brazilian domestic rates; what’s more you are getting capital gains from currency appreciation. No wonder local markets in general and Brazil’s in particular are the new hot asset class.

In emerging market trade body EMTA’s quarterly volume surveys, local-market treasury instruments consistently account for roughly half of the total volume in emerging market debt. That’s up from 19% in 1994 and 35% in 2000, and means that every year banks trade more than $2.5 trillion in Brazilian reais, Mexican pesos, Polish zlotys and other formerly exotic currencies, much of it being sold to US and European investors who have never owned such securities before.

“Latin America has been invaded by a new flow of money in the last year and a half,” says Jorge Alonso, head of Latin America local markets at JPMorgan. Alonso estimates that foreign holdings of Latin governments’ treasury securities have doubled in that time.

And in the equity markets, between 60% and 70% of the free float in the Brazilian market is in the hands of foreigners, according to estimates from Dario Lizzano, head of Latin American equities at Santander in New York.

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