Investors are stepping up purchases of the shortest-term Mexican government bills to a seven-month high to tap into a rally in the peso.
The government sold 11 billion pesos ($933 million) of 28-day notes during the past two weeks, the most since September, according to the central bank. The 28-day cetes, as the securities are known, drew bids in an April 5 auction worth 4.9 times more than the 5.5 billion pesos sold, the highest bid-to-cover ratio since September. Cetes due on May 12 yield 4.28 percent, compared with 0.02 percent for similar-maturity U.S. Treasuries.
Purchases of the securities are rising as accelerating growth in Latin America’s second-biggest economy fuels a 4.7 percent gain in the peso this year and near-zero rates in the U.S. spur demand for higher-yielding assets. Foreign investor holdings of Mexican government debt maturing in less than a year surged to 33 percent this month from 7 percent a year earlier and reached a record 37 percent in March, according to the central bank.
“If the fundamentals for the currency are strong, the central bank isn’t intervening and the yields are attractive, this is a super trade for me,” Alejandro Urbina, who helps oversee $800 million of assets at Silva Capital Management LLC, said in telephone interview from Chicago. “There is a lot of value in the short end of the curve.”
The peso rose to 11.7305 per dollar on April 8, the strongest level since October 2008, as Finance Minister Ernesto Cordero predicted the economy will grow as much as 5 percent this year after a 5.5 percent expansion in 2010 that was the fastest in a decade.
Cetes are luring investors wary of buying longer-term securities amid a worsening nuclear crisis in Japan and growing bailouts in Europe, according to Alejandro Hernandez, who manages about $1.2 billion at Grupo Financiero Interacciones SA.
Japan raised the severity rating of its nuclear crisis to the highest, matching the 1986 Chernobyl disaster, after increasing radiation prompted the government to widen the evacuation zone and aftershocks rocked the country. Portugal is seeking an estimated 80 billion-euro aid program, the third euro-region nation to request a bailout in a year.
“The 28-day cete allows you to cover your positions and you’re not tied down in the long term,” Hernandez said in a telephone interview from Mexico City. “Everyone is aware of what’s happening in Japan. The people that are buying these instruments are looking to wait and see how the market settles.”
Foreign investor demand for cetes will taper off as the Federal Reserve raises interest rates and the rally in oil wanes, said Jaime Ascencio, a fixed-income analyst at Corporacion Actinver SA. He predicts the peso will weaken to 12.34 per dollar by the end of the year.
“We have seen the volatility the peso can have even though the economic outlook is very favorable,” Ascencio said in a telephone interview from Mexico City. “We are not very optimistic on the peso. Any little change and the peso will slip.”
The peso rose 0.4 percent to 11.7875 per U.S. dollar today.
The extra yield investors demand to own Mexican government dollar bonds instead of U.S. Treasuries narrowed 5 basis points, or 0.05 percentage point, to 125, according to JPMorgan Chase & Co.
The cost to protect Mexican debt against non-payment for five years rose 2 basis points to 100, 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.
Yields on the interbank rate futures contract due in August fell 4 basis points to 4.96 percent, indicating traders no longer expect a rate increase that month. In the past five years, the gap between the 28-day TIIE and the overnight rate has averaged 36 basis points.
Banco de Mexico will keep its benchmark lending rate at a record low 4.5 percent at its policy meeting on April 15, according to a Bloomberg survey of 14 economists.
Mexican peso debt has returned 1.8 percent in the past month, compared with a 1 percent gain for local-currency bonds sold by developing nations, according to Bank of America Merrill Lynch indexes.
“As an investor based in the U.S., anytime the peso is doing better that means I get a better return,” Silva Capital’s Urbina said. “My return in that case is going to be great.”