Trouble in Paradise

The timing, as always with political events of this kind, will be hard to get right. As we mentioned, some obvious potential catalysts are coming up soon: that looming debt maturity in 2018 being one. Andrews Stanners, of Aberdeen, said in a report that he does not expect a credit event in 2017 but that the government will “muddle through” until 2018. Should it survive beyond that, the 2021-22 period would likely be the next big trigger.

How to play it? Bonds are one option. Though longer bonds are down, shorter maturities are trading at higher levels -- the two year, for example, is above 96 -- so a short might make sense there. Equities are murky: while there are Barbados-based companies that hold assets in USD and liabilities in local currency, its hard to find one that offers a pure play against the peg. We think the best move here is likely the most direct. If and when the peg breaks, people short BBD against USD are going to make major gains. (Although it is, admittedly, hard to trade directly in Barbadian dollars.) Given the continuing swirl of fog that seems to surround once rock-solid geopolitical certainties, this looks like a good bet to us.

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