Pension Bulls Buy Bonds at Fastest Pace in ’11 on Inflation: Mexico Credit

Mexican pension funds are stepping up their purchases of longer-maturity bonds at the fastest pace since December as inflation holds near a five-year low.

Pensioners, the second-largest fixed-income investors in the country, boosted their holdings of fixed-rate bonds due in more than 10 years by 4.3 percent to 182.4 billion pesos ($15.7 billion) in April from March, according to the most recent central bank figures. The purchases mark a reversal from the first three months of the year, when they cut holdings by 2.6 percent on concern consumer price increases were set to quicken.

While surging commodity prices have fanned inflation in developing countries from China to Brazil, cost of living increases in Mexico have slowed, allowing the central bank to keep borrowing costs at a record low. Annual inflation eased to 3.3 percent in mid-May from 4.4 percent in 2010 and touched a five-year low of 3.04 percent in March.

“It’s a positive signal,” Caroline Gorman, who helps oversee $7.6 billion in assets, including peso-denominated bonds, at GAM Ltd., said in a telephone interview in London. “It’s a comfort for us that there’s a backstop local bid for Mexican bonds, which is one of our favorites. Inflation has been well behaved.”

Yields on the government’s benchmark peso bonds due in 2024 sank 75 basis points, or 0.75 percentage point, since the end of March to a five-month low of 7.09 percent, according to Banco Santander SA. Yields on 10-year U.S. Treasuries, the benchmark for emerging-markets bonds, fell 40 basis points to 3.07 percent while those on similar-maturity Brazilian notes declined 48 basis points to 12.48 percent during that time.

‘Very Good’

Mexican peso-denominated debt has returned 4.5 percent since the end of March in local-currency terms, triple the average gain of 1.5 percent for emerging-market bonds through May 27, according to Bank of America Merrill Lynch. The Mexican securities lost 0.9 percent in the first quarter, the worst start to a year since 2005.

Consumer prices plunged 0.75 percent in the first two weeks of May as the cost of food and electricity dropped, according to the central bank. Prices fell 0.01 percent in April, the first decline in 10 months.

The mid-May figure “is a very good number,” central bank Governor Agustin Carstens, a candidate to head the International Monetary Fund, said in a May 24 interview. Falling bond yields are “consistent with the fact that Mexico had a better-than- expected inflation performance,” he said.

Foreigners’ Purchases

Policymakers kept their benchmark rate at 4.5 percent on May 27 for a record 19th straight meeting. Inflation is “still within the forecast” of policy makers and there has been some “moderation in the pace” of the economic expansion, the bank said in a statement following the meeting. Banco de Mexico is the only major central bank in Latin America that hasn’t raised interest rates this year.

Yields on the TIIE interest-rate futures contract maturing in December fell five basis points to 5.03 percent last week, indicating traders expect the central bank will boost its benchmark rate by that month. As recently as April, they predicted an increase in borrowing costs by July.

Pension funds, known in Mexico as Afores, invested 650 billion pesos in government bonds as of May 16, up from 626 billion last year, according to the central bank. Foreigners, the biggest buyers of the debt, boosted their holdings to 801 billion pesos, a 34.6 percent jump from December.

“Pension funds are chasing the market,” Pablo Cisilino, who helps manage $22 billion in emerging-market debt at Stone Harbor Investment in New York, said in a telephone interview. “They’ve been extending duration. Inflation is under control and rates are attractive.”

Narrowing Gap

Guillermo Garcia Ramos, a fund manager at Pensionissste, the country’s second-largest pension fund by total assets, declined to comment. An official at BBVA Bancomer who asked not to be identified declined to comment. Bancomer controls Mexico’s third-largest pension fund. An official at Afore Banamex who asked not to be identified declined to comment. Banamex is the country’s biggest fund.

“The statements of the bank as well as recent inflation data have helped to consolidate the sense that in reality we don’t currently have real concerns over inflation,” Alejandro Diaz de Leon, head of public debt at the Finance Ministry, said in a telephone interview from Mexico City. “This all gave way to a rally due to renewed appetite from the Afores as well as a renewed appetite from foreigners.”

The yield gap between two- and 10-year bonds has narrowed to 160 basis points from 207 in February, according to data compiled by Bloomberg.

‘Biggest Conviction’

“The biggest conviction is that there’s still room for some more flattening of the curve,” Guilherme Maciel de Barros, who oversees $1.1 billion in emerging-market assets at Lombard Odier Darier Hentsch & Cie in Geneva, said in a telephone interview. “Inflation is still quite contained and the economy still has some slack.”

The extra yield investors demand to hold Mexican dollar bonds instead of U.S. Treasuries fell one basis point to 147 at 5:49 p.m. New York time, according to JPMorgan Chase & Co.’s EMBI+ Index.

The cost to protect Mexican debt against non-payment for five years was little changed at 105 basis points, 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 government or company fails to adhere to its debt agreements.

Commodities Rally

The peso was little changed at 11.6084 per dollar.

Pension funds boosted their holdings of fixed-rate bonds to 21.5 percent of their 1.429 trillion pesos of assets in April, from 21.2 percent in March, the first increase since October, according to the regulator, known as Consar. Bonds maturing in 2023 and beyond accounted for about 68 percent of the debt holdings, up from 62 percent at the end of March, according to the central bank.

ING Groep NV is recommending clients reduce holdings of longer-maturity bonds because higher commodity prices may fuel inflation in Mexico. The UBS Bloomberg Constant Maturity Commodity Index has climbed 4.9 percent this year, extending gains over the past two years to 49 percent.

“Despite the fragile economic outlook, upward inflation risks linger globally,” ING economists led by Debora Luna and Ezequiel Garcia wrote in a note to clients on May 25. “Market participants assuming Mexico will remain isolated may be unwise.”

U.S. Growth

Luna declined to comment further when reached by phone.

Slowing growth in the U.S., which buys about 80 percent of Mexican exports, is prompting pension funds to bet inflation in the Latin American country will remain in check, said Siobhan Morden, an emerging markets debt strategist with RBS Securities.

The U.S. economy expanded at a 1.8 percent annual rate in the first quarter, less than the 2.2 percent median forecast in a Bloomberg News survey and down from 3.1 percent in the last three months of 2010.

“Everything comes back to the high correlation with the U.S.,” Morden said in a telephone interview from Stamford, Connecticut. “With the concern about the U.S. growth, there’s implicit concern about Mexico growth. Lower inflation just reaffirms that there’s no rush to hike” rates, she said.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Jonathan J. Levin in Mexico City at jlevin20@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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