Peru Yields Fall as Investors Use Weaker Sol to Boost Holdings

Peruvian bonds gained, pushing down yields the most in three weeks, as investors took advantage of a decline in the sol to buy debt at cheaper dollar-based prices.

The yield on the government’s benchmark 7.84 percent sol- denominated bonds due August 2020 dropped seven basis points, or 0.07 percentage point, to 3.77 percent at 11:42 a.m. in Lima, according to data compiled by Bloomberg. The bonds’ price climbed 0.51 centimo to 126.30 centimos per sol.

The sol closed at a seven-week low yesterday after the Finance Ministry pledged to buy $4 billion in the foreign- exchange market and the central bank raised reserve requirements to help stem the currency’s appreciation. The weaker sol makes it cheaper for foreign investors to purchase Peruvian bonds while a drop in implied yields on sol forwards has cut the cost of hedging currency risk, said Diego Llona, a bond trader at Banco Santander Peru SA.

“Right now the hedge is a bargain,” Llona said in an e- mailed message.

The sol gained 0.1 percent to 2.5725 per U.S. dollar, according to prices compiled by Bloomberg. It closed at 2.5755 yesterday, the lowest since Dec. 11.

One-month implied yield on sol forwards, a measure of the costs to hedge, fell to -4.93 percent on Jan. 22, the lowest since August 2010, according to data compiled by Bloomberg. The yield was -1.41 percent today.

The implied yield is derived from the difference between the spot and forward price and compares with the central bank’s benchmark interest rate of 4.25 percent.

To contact the reporter on this story: John Quigley in Lima at jquigley8@bloomberg.net

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