Colombian bonds tumbled, pushing benchmark yields up the most in more than a year, after lawmakers scaled back the government’s tax-reduction proposal for foreigners investing in the local debt market.
The yield on the government’s 10 percent peso-denominated bonds due in July 2024 surged 17 basis points, or 0.17 percentage point, to 6.02 percent at the close in Bogota, according to the central bank. The bond’s price fell 1.67 centavos to 132.568 centavos per peso. The increase in the yield was the biggest since October 2011.
Lawmakers proposed a 25 percent tax rate on foreigners’ bond profits, rewriting a bill from President Juan Manuel Santos that sought to cut the rate to 14 percent to lure more investment and reduce the government’s borrowing costs. Bonds plunged as traders pared back expectations for a pickup in demand from foreigners, who currently pay a 33 percent tax rate.
“This was unexpected and is causing a big move in markets today,” said Jorge Ruiz, a trader at Corp. Financiera Colombiana SA in Bogota. “They are still cutting the tax but 14 percent was obviously much more attractive.”
The tax rate in the rewritten bill is in line with a proposed 25 percent rate for corporate profits for Colombian companies. The legislation must be approved by Congress this month to go into effect in 2013.
Finance Minister Mauricio Cardenas told reporters today that the change looks to maintain fairness between local and foreign investors. The impact the rate reduction may have on the exchange rate wasn’t part of the decision, he said.
Colombia is looking to reduce yields in the $83 billion local debt market by attracting more foreign investors with the proposed tax cut, Public Credit Director Maria Fernanda Suarez said in an interview last month.
The peso declined almost 0.1 percent to 1,800.22 per U.S. dollar today, paring its rally in 2012 to 7.7 percent.
The central bank’s surprise interest-rate cut on Nov. 23 and an unexpected decline in consumer prices last month drove yields on the benchmark bond due July 2024 to a record low last week. The yield has jumped 19 basis points from 5.83 percent on Dec. 6, which was the lowest level on a closing basis since the securities were first issued in 2009.
Banco de la Republica lowered the target lending rate by a quarter-percentage point to 4.5 percent on Nov. 23, surprising all except two of 33 analysts surveyed by Bloomberg.
Consumer prices fell 0.14 percent in November, the national statistics agency reported Dec. 5. The median forecast of 29 economists surveyed by Bloomberg was for a 0.15 percent increase. Annual inflation slowed to 2.8 percent, within the central bank’s 2 percent to 4 percent target.
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