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Colombia Bonds Rally on Tax Rate Cut for Foreigners; Peso Rises

Colombia’s bonds jumped, pushing benchmark yields to record lows, and the peso gained after Congress voted to reduce a tax on foreigners’ bond profits by more than half.

The yield on the government’s 10 percent peso-denominated securities due in 2024, known as TES, dropped 13 basis points, or 0.13 percentage point, to 5.72 percent, the lowest level since the securities were issued in 2009, according to the central bank. The bond’s price gained 1.315 centavos to 135.444 centavos per peso.

The levy will fall to 14 percent from 33 percent for foreign investors except those from countries considered tax havens, who will be taxed at a 25 percent rate, Finance Minister Mauricio Cardenas told reporters in Bogota yesterday. The changes are part of a wider tax initiative approved by Congress today that lowered payroll contributions while increasing taxes on revenue.

“This is bullish for local bonds,” said Camilo Perez, head analyst at Banco de Bogota SA, the nation’s second-biggest bank.

Local peso bonds also gained on speculation the central bank would lower the overnight lending rate today for a second straight month to buoy growth in the Andean country, according to Perez.

After the close of market, Banco de la Republica announced it lowered the key rate a quarter point to 4.25 percent, as forecast by 11 of 32 analysts surveyed by Bloomberg. The other 21 analysts forecast no change in the rate.

The peso climbed 0.7 percent to 1,776.85 per U.S. dollar, the strongest level on a closing basis since July 18. It extended its rally this year to 9.1 percent.

Cardenas said the government may take measures to stem gains in the peso should the tax cut lead to further appreciation. In August, the Treasury joined the central bank in buying dollars in the foreign-exchange market to curb the peso’s rally.

‘Other Instruments’

“If this leads to problems with the exchange rate, we’ll resort to other instruments,” Cardenas said. “We can’t lose the chance of lower borrowing costs in Colombia.”

Yesterday’s agreement between the lower house and the Senate ended weeks of negotiations that caused volatility in the local debt market. Lawmakers rejected a Senate initiative for a rate of 25 percent for all foreigners. The government proposed the bill to lure more foreign investment to the bond market and reduce its borrowing costs.

Yield Spread

Colombia’s benchmark local bonds due in 2024 yield 1.52 percentage points more than its overseas peso securities, compared with a gap of 2.18 percentage points in November. Nomura Holdings Inc. forecasts the gap between local securities and the overseas bonds will narrow further.

“The reduction in the tax could trigger an important inflow into the local market,” Mario Castro, a strategist at Nomura, wrote in a report today. “Foreigners will gradually migrate into the local market because it is more liquid and offers more attractive yields than Global TES.”

About 3 percent of TES securities are held by foreigners, according to the Finance Ministry.

To contact the reporters on this story: Andrea Jaramillo in Bogota at ajaramillo1@bloomberg.net; Oscar Medina in Bogota at omedinacruz@bloomberg.net

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

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