Bank of America analysts say Colombia has not entered what they term "receiver territory" following a recent hawkish surprise from the country's central bank, BanRep, according to a research note published Monday.
The analysts interpret BanRep's move as part of a more front-loaded hiking cycle. They argue that by acting earlier and more decisively, the central bank is communicating a greater commitment to prevent long-term inflation expectations from becoming unanchored. In the analysts' view, this approach could ultimately permit a lower terminal policy rate than would likely be reachable if rate increases were rolled out more gradually.
Despite that assessment, Bank of America warns that Colombia's elevated election uncertainty remains a material source of risk. The note cautions that contested or uncertain fiscal outcomes tied to the political cycle could create scenarios in which BanRep would need to adopt a more aggressive tightening stance than markets currently price in.
On positioning, the research team identifies relative-value opportunities within Colombia's yield curve. They point out that 5-year rates appear expensive relative to both 2-year and 10-year yields, recommending a structured trade they describe as a "2y5y10y fly pay wings." The suggested entry for that strategy is 28 basis points, with a performance target of 75 basis points and a stop-loss placed at 10 basis points.
Bank of America highlights two primary risks to the trade thesis. First, a dovish pivot from BanRep would undermine the rationale for the position. Second, any reduction in policy or fiscal uncertainty in Colombia would alter the relative-value relationships the trade seeks to exploit. Both outcomes would affect the appeal and potential performance of the recommended trade.
Clear summary
Bank of America sees BanRep's recent hawkish move as evidence of a front-loaded hiking cycle that supports anchoring inflation expectations and could allow for a lower terminal rate, but election-linked fiscal uncertainty could force tighter policy. The firm recommends a relative-value trade in Colombian yields, while flagging dovish shifts and reduced fiscal uncertainty as key risks.
Contextual note
The research note focuses on policy signaling, yield-curve dynamics, and trade implementation, without extending claims beyond the scenarios and figures included above.