巴黎银行-新兴市场-宏观策略-新兴市场CDS模型：巴西的销售保护策略分析-20180619-10页_521kb

EM/LATAM STRATEGY Summary

Core Content

This document outlines a CDS (Credit Default Swap) model for emerging markets (EM) and Latin America, with a specific focus on Brazil. The model aims to assess the fair value of 5-year CDS contracts by incorporating debt dynamics, US real interest rates, and the spread between BAA-rated US Corporates and US Treasury (UST) yields.

The key hypothesis is that debt dynamics significantly influence EM and Latin America credit risk, which is represented by the 5-year CDS. The model is designed to approximate the theoretical level of 5-year CDS using three explanatory variables:

1. Debt dynamic indicator (domestic) – Reflects the sustainability of the debt-to-GDP ratio.
2. US real interest rates (external) – Captures external financial conditions.
3. Spread between BAA rated US Corporates and UST yield – Indicates the relative cost of corporate borrowing compared to government debt.

The model results show that Brazil's 5-year CDS is overbought, suggesting that the current level may be higher than its fair value. The model's 95% non-parametric probability bands are 107bp to 264bp, and the current market level is 283bp, which is above the upper band.

Main Points

• Model Framework: The model is based on a formal framework that incorporates both domestic and external variables to estimate the fair value of CDS.
• Debt Dynamics: The analysis considers the sustainability of public debt by evaluating the real interest rates, GDP growth, and primary deficit. The model introduces a more nuanced view by including foreign currency debt (FCD) and tradable GDP to assess the impact of currency mismatch on debt sustainability.
• Debt Sustainability: A country with a high share of FCD and a low tradable GDP is more vulnerable to currency depreciation. Conversely, countries with a low share of FCD and high tradable GDP (like Brazil) face lower debt risk from currency weakness.
• CDS Analysis: The model estimates Brazil's 5-year CDS to be overbought by 80bp compared to the theoretical fair value. The model's fair value range is 107bp to 264bp, with the current market level at 283bp.
• Trading Strategy: Based on the model results, a selling protection strategy is initiated for Brazil 5-year CDS. The strategy includes:
  • Entry point: 283bp (11AM NYT)
  • Allocation: USD 10k DV01 (~USD 25mn)
  • Initial target: 230bp
  • Stop loss: 320bp
  • Carry: +5.4bp per month

Key Information

• Model R²: The model has a high R² of 0.83, indicating strong explanatory power.

• Debt Dynamics Equation:
  $$
  \Delta b = d + (r - g) \times b + s
  $$
  Where:

  • $d$ = primary deficit as a proportion of GDP
  • $r$ = real interest rates
  • $g$ = real GDP growth
  • $s$ = seigniorage
  • $b$ = current debt-to-GDP ratio

• Debt Sustainability Formula:
  $$
  b_t = \frac{D_L + e \times D_F}{P_n \times Y_n + e \times P_t \times Y_t}
  $$
  Where:

  • $D_L$ = domestic currency debt
  • $D_F$ = foreign currency debt
  • $e$ = exchange rate
  • $P_n$ = non-tradable price level
  • $P_t$ = tradable price level
  • $Y_n$ = non-tradable GDP
  • $Y_t$ = tradable GDP

• Country Comparison: A table is provided comparing external debt, reserves, and GDP across several EM/Latam countries, highlighting Brazil's lower vulnerability to currency depreciation due to its higher reserves and larger tradable GDP.

Strategy Implications

• The model is not limited to Brazil; the same methodology is planned for other EM/Latam countries.
• The main risk to the recommendation is the domestic political environment.
• The model is not investment research under MiFID II and is considered non-independent research.
• The document is a marketing communication and is intended for Relevant Persons only.
• The carrying cost is +5.4bp per month, indicating a positive carry for the strategy.
• The strategy is subject to market dynamics, and the target and stop loss levels may be adjusted accordingly.

Legal and Risk Disclosures

• The document contains non-independent research, and the analysis may be subject to conflicts of interest.
• Performance data may be based on back-testing and is not indicative of future results.
• The document is not a prospectus, advertisement, or public offering.
• Options and ETFs discussed in the document are complex instruments with high risk and are not suitable for all investors.
• Restricted securities may be referenced, and only QIBs or non-US persons may be eligible to purchase them.
• Confidentiality is emphasized, and the document must not be copied, reproduced, or distributed without prior written consent.

Conclusion

The document concludes that the Brazil 5-year CDS is overbought, and a selling protection strategy is initiated. The model provides a structured approach to assessing credit risk in EM/Latam, incorporating debt dynamics, external conditions, and currency mismatch. The strategy is subject to market changes and political risks, and is part of a broader plan to apply the same model to other EM/Latam countries.