Biggest bond rally since 2009 sparked by peso: Mexico credit

Mexico’s peso bonds are posting their biggest rally in two years on speculation government measures to support the currency will bolster dollar-based returns.

Yields on Mexico’s benchmark notes due in 2024 fell 40 basis points last week, the most since the five-day period ended March 27, 2009, to 6.59 percent, according to data compiled by Bloomberg. Yields on Brazil’s real-denominated securities maturing in 2021 fell one basis point, or 0.01 percentage point, during the same period to 11.21 percent.

Mexico’s currency-exchange commission said Nov. 29 the central bank will auction $400 million of its reserves daily to arrest a slide in the peso that’s made the currency the worst performer in Latin America this year. Mexican peso debt gained 7.3 percent in dollar terms last week, more than double the average return for local-currency emerging-market bonds, after the announcement sparked an advance in the peso and global markets rallied, according to Bank of America Corp.

“When they came out with the auction mechanism that’s going to limit volatility going forward in Mexico, that was the key turning point for rates,” Dirk Willer, head of Latin American local markets strategy at Citigroup Inc., said in a telephone interview from New York. “You obviously expect a much flatter curve if you think there’s foreign-exchange volatility.”

Stocks globally surged last week after the Federal Reserve and five other central banks lowered the cost of dollar funding to help ease Europe’s debt crisis.

‘Preventative’

The peso soared 4.4 percent last week to 13.6363 per dollar. It advanced 1.1 percent to 13.4826 at 6:58 a.m. in Mexico City, paring its decline this year to 8.5 percent.

The currency measure, which Mexico last used 19 months ago to stem declines in the peso following the collapse of Lehman Brothers Holdings Inc., is “preventative” and designed to provide liquidity to the market during times of volatility, the commission said in a statement.

A rebound in investor confidence globally and the government’s currency measures helped drive the rally in Mexican bonds last week, Deputy Finance Minister Gerardo Rodriguez, 39, said in an interview at Bloomberg headquarters in New York on Dec. 2.

Mexican bonds are gaining as investors seek to take advantage of the advance in the peso, said Alberto Bernal, head of fixed-income research for Bulltick Capital Markets.

“If you’re going to hold pesos, you should hold something that gives you some yield and that’s the Mbono,” as local fixed-rate bonds are known, Bernal said in a telephone interview from Miami. The bonds’ rally this week “has everything to do with the performance of risk assets around the world.”

‘Probably Ripple’

Gains in Mexican bonds may be “easily” reversed if European leaders fail to reach an agreement on tightening fiscal mandates next week, said Enrique Alvarez, head of Latin America fixed-income research at IdeaGlobal in New York.

“The market could suffer from shock, and that would probably ripple into the Mexican fixed-income arena,” Alvarez said in a telephone interview.

The extra yield investors demand to own Mexican government dollar bonds instead of U.S. Treasuries fell nine basis points today to 217, according to JPMorgan’s EMBI Global index.

The cost to protect Mexican debt against non-payment for five years fell five basis points to 153, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower fails to adhere to its debt agreements.

‘Flexibility’

Yields on interbank rate futures due in March rose four basis points on Dec. 2 to 4.72 percent, signaling traders expect central bank Governor Agustin Carstens to lower borrowing costs that month.

Policy makers kept the country’s benchmark interest rate unchanged on Dec. 2 for a 23rd straight meeting, saying in the statement accompanying its decision that it will remain “alert” to the global economic outlook.

The currency measure will help give the central bank more “flexibility,” said Rodriguez, who was previously head of public debt at the Finance Ministry.

“What the central bank needs is an environment of certainty,” he said in the interview. “An environment with certainty is a better one for decision making not only by authorities, but also by the private sector. If it ultimately contributes through these channels for the bank to have more leeway, then, the better.”

Mexico is the only major Latin American country to leave rates unchanged over the past year.

A press official at the central bank didn’t respond to a request for comment.

Mexico’s “monetary policy stance is obviously completely unchanged and so the bonds are really much more driven by the foreign exchange,” Citigroup’s Willer said.