JPMorgan-Inspired Colombia bond buying backfire

Investors who piled into Colombia's local-currency bonds after JPMorgan Chase & Co. increased the country's representation in its debt indexes are suffering the worst losses in Latin America this month.

The nation's peso-denominated notes have dropped 1.7 percent in dollar terms, on pace for the worst month since January. Local government bonds in emerging markets have gained an average 0.5 percent, data compiled by Bloomberg show.

Foreign investors raised their holdings of Colombia's peso notes to a record after JPMorgan announced in March it would more than double the weighting of the securities in two bond indexes. Now, with about 80 percent of expected flows having come into Colombia, the bonds are falling as the peso weakens and prospects of higher U.S. interest rates damps demand for higher-yielding emerging market assets, Credit Suisse Group AG said.

“Colombia will not have that buffer anymore of one-time portfolio flows,” Juan Lorenzo Maldonado, a Latin America economist at Credit Suisse, said by telephone from New York. “Once the re-weighting process is over, it's going to likely be over at the same time that everyone is wondering when the U.S. is going to start increasing rates.”

Foreigners' peso debt holdings rose to 12.5 percent in July, from 6.7 percent in February, Finance Ministry data show. Veronica Navarro Espinosa, a spokeswoman for JPMorgan, declined to comment on the changes.

‘More Marginal'

The Colombian peso has lost 2.7 percent this month, the most in emerging markets after the Chilean peso. Yields on the nation's benchmark peso bonds due 2024 have climbed 0.34 percentage point to 6.47 percent, after reaching a 10-month low on April 9, according to data from the central bank.

“JPMorgan helped a lot in previous months, but we're now nearer to the end of this adjustment than to its beginning,” Camilo Perez, the chief economist at Banco de Bogota, said in a telephone interview from Bogota. “What's left is more marginal in terms of inflows.”

Assaf Shtauber and Armando Armenta, analysts at Deutsche Bank AG, said there's a “plausible” scenario in which as much as $12.9 billion would flow into Colombia, on top of the $6.2 billion that has already entered following the increased weighting. Investor interest in Colombia generated by the move among “non-index followers” may boost capital flows even more, they wrote in an Aug. 19 research report.

Additional Flows

Higher-than-expected additional inflows into Colombia's local peso bonds, known as TES, “bode well for a long position in COP, as well as in rates,” they wrote.

JPMorgan said in March that it would increase the weight of Colombian peso bonds in its GBI-EM Global Diversified index in a “phased approach” starting May 30 and ending Sept. 30. The bank projects that Colombia's weight will rise to 7.8 percent by the end of September, according to a July 22 report, from 3.2 percent in March.

Policy makers including Finance Minister Mauricio Cardenas and central bank co-director Adolfo Meisel said this month that the foreign-exchange impact of JPMorgan's decision to more than double Colombia's weighting in two of its bond indexes is fading. As the JPMorgan effect wears off, the peso is reverting to its weakening trend, Cardenas said Aug. 26.

“Most of the flows already entered Colombia,” Munir Jalil, the head analyst at Citigroup Inc.'s Colombia unit. “The story is basically over.”