BBVA Bancomer Bets on CPI Pickup in Bond Market: Mexico Credit

Mexico's Central Bank Governor Agustin Carstens
Mexico's Central Bank Governor Agustin Carstens. Photographer: David Rochkind/Bloomberg

BBVA Bancomer, the largest holder of Mexican government peso bonds, plans to buy inflation-linked debt as a bet consumer price increases will quicken beyond forecasts after slowing to a five-year low.

Jorge Perez Samano, who manages about 450 billion pesos ($38 billion) at Bancomer, said he expects inflation to accelerate to as much as 4.2 percent this year, higher than the 3.7 percent median estimate in a Bloomberg survey of economists. Faster economic growth spurred by the U.S. recovery will drive up prices in 2011, boosting demand for bonds that protect against inflation, he said.

“Inflation-linked bonds are a great investment,” Perez Samano, who holds the notes in his portfolio and plans to add more of the bonds, said in a March 30 interview in Mexico City. “We are very optimistic about growth in Mexico this year.”

The securities dropped 3.2 percent in 2011, compared with an advance of 1.9 percent for similar notes sold by Latin American governments, according to Barclays Plc indexes. The average yield on the Mexican bonds jumped 62 basis points this year to 3.85 percent, or 225 basis points less than Brazilian bonds tied to consumer prices.

Mexico is the only major Latin American country that hasn’t boosted interest rates in the past year as prices increased at the third-slowest pace in the region after Chile and Peru. Mexican inflation slowed to 3.1 percent in the 12 months through mid-March, the lowest annual rate since May 2006 and half the 6.1 percent pace in Brazil, the region’s biggest economy.

Real Rates

Developing nations from China to South Africa are struggling to stem inflation spurred by a 30 percent increase in commodities in the past 12 months.

Annual inflation in Mexico may quicken to 3.96 percent over the next five years, according to the yield difference, or breakeven rate, between fixed-rate bonds and debt linked to consumer price increases.

Mexico’s inflation-adjusted, or real, benchmark rate is 0.93 percent, higher than the rates of -1.5 percent in Russia and -5.01 percent in Bulgaria, countries that share Mexico’s foreign debt rating of BBB from Standard & Poor’s, according to data compiled by Bloomberg. Brazil, which is rated BBB-, or one level below Mexico, has a real interest rate of 5.74 percent.

“Investments in instruments tied to real rates have a lot more value right now because of the pickup in inflation that is coming,” Javier Belaunzaran, who helps manage about 40 billion pesos of fixed-income debt at Interacciones Casa de Bolsa SA, said in an interview. Inflation-linked bonds are “a really good option,” he said.

Rate Outlook

Annual inflation may quicken to as much as 3.8 percent this year, said Belaunzaran, who recommends buying bonds tied to consumer prices that mature in more than 10 years.

Price increases will prompt Central bank Governor Agustin Carstens to raise the overnight lending rate about 75 basis points, or 0.75 percentage point, to 5.25 percent by year-end, trading in 28-day interbank rate futures contracts, known as TIIE, shows. The bank has left its benchmark lending rate at a record low 4.5 percent since July 2009 to support the economy’s recovery from its worst recession since 1995.

Gross domestic product may grow as much as 5 percent this year after expanding 5.5 percent in 2010, the fastest pace in 10 years, Finance Minister Ernesto Cordero said last month.

U.S. Recovery

Growth in the U.S., which buys 80 percent of Mexican exports, may accelerate to 3.1 percent this year from 2.9 percent in 2010, according to the median estimate in a Bloomberg survey of 68 economists. The U.S. rebound helped drive Mexican exports to a record $298 billion last year.

The U.S. unemployment rate unexpectedly dropped to a two-year low of 8.8 percent in March as employers created more jobs than forecast, adding to evidence of a recovery in the labor market.

The yield on Mexico’s 10 percent peso bond due in 2024 fell 3 basis points today to 7.797 percent, according to Banco Santander SA.

Yields on the TIIE futures contract maturing in July were unchanged at 5 percent.

The cost to protect Mexican debt against non-payment for five years fell 1 basis point to 101, according to CMA. Credit-default swaps pay the buyer face value in exchange for the underlying securities or cash equivalent if the issuer fails to comply with debt agreements.

Peso Rally

The extra yield investors demand to hold Mexican dollar bonds instead of U.S. Treasuries narrowed one basis point to 132 today, according to JPMorgan.

The peso slipped 0.1 percent to 11.84990 per dollar, near the strongest since October 2008, and is up 4.2 percent this year.

Mexico plans to sell about 2.8 billion pesos of 29-year inflation-linked bonds tomorrow.

Inflation will accelerate to 3.92 percent this year, according to a monthly central bank survey conducted in March and released on April 1. The median forecast was 3.94 percent in February.

“I still don’t see any opportunities to buy these bonds because inflation is well anchored,” Benito Berber, an emerging-market analyst at Nomura Securities in New York, said in a telephone interview. “The lack of concern about inflation is keeping demand low.”

The yield on Mexico’s inflation-linked bonds due in 2012 rose 58 basis points this year to 1.87 percent, according to data compiled by Bloomberg.

Mexican bonds tied to consumer prices returned 11 percent in 2010, their seventh straight year of gains, according to Barclays.

“An investor that is planning for the long-term must have this kind of instrument in his portfolio,” Perez Samano said.

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