Credit Suisse Group AG, Switzerland’s second-largest bank, is buying Mexican inflation-linked bonds as a bet a rebound in food prices will extend the debt’s outperformance over fixed-rate notes to a fourth month.
Yields on bonds tied to the consumer price index that mature in 2012 dropped 55 basis points, or 0.55 percentage point, in the past month to 0.49 percent, according to data compiled by Bloomberg. The yield on similar-maturity fixed-rate securities yield fell eight basis points in the same period to 4.95 percent. The inflation-linked bonds have beaten fixed-rate debt for three straight months, the longest streak since August.
“There are some points on the curve that still offer opportunities for investors,” Fernando Buendia, chief investment officer for private banking in Mexico at Credit Suisse, said in an interview at Bloomberg’s Mexico City office. “From here on, there is a moment to take advantage of the premium offered by inflation-linked debt.”
Credit Suisse, whose Chief Investment Officer Stefan Keitel oversees $200 billion, holds Mexico’s inflation-linked notes due in 2012, Buendia said.
Food prices in Latin America’s second-biggest economy will increase after posting their biggest tumble in six years in June, helping fuel inflation, Buendia said. The costs of food items from tortillas to tomatoes fell 6.4 percent last month, helping slow inflation increases to an almost five-year low of 3.28 percent in June. Policy makers held the lending rate at a record low 4.5 percent July 8, the only major Latin American country to keep borrowing costs unchanged in the past year.
Inflation will quicken to 3.6 percent by the end of the year, Buendia said. Consumer prices rose at a 3.04 percent annual rate in March, the slowest since May 2006. In Brazil, the region’s biggest economy, annual inflation accelerated to 6.71 percent last month, the fastest pace since June 2005.
The yield gap between Mexican inflation-linked debt due in 2012 and similar-maturity fixed-rated bonds, a gauge of investor expectations for price increases, widened to 446 basis points yesterday, the most since Feb. 26, 2010, according to data compiled by Bloomberg. In Colombia, the so-called breakeven-rate is 334 basis points, up from 331 a month ago.
Alejandro Padilla, a debt strategist at Grupo Financiero Banorte-Ixe in Mexico City, recommends investors buy bonds that protect against consumer price increases as rising food costs will drive inflation to 3.7 percent by year end.
“The inflation we are going to see for the rest of the year is going to be much higher than at the beginning,” Padilla said in a telephone interview. “Prices for agricultural goods, which helped keep inflation in check earlier, are going to head higher for the rest of the year.”
The extra yield investors demand to hold Mexican government dollar bonds instead of U.S. Treasuries narrowed 9 basis points to 140 basis points, according to JPMorgan Chase & Co.
The cost to protect Mexican debt against non-payment for five years rose 1 basis point to 115 basis points, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.
Yields on futures contracts for the 28-day TIIE interbank rate due in February fell 4 basis points to 4.96 percent, indicating traders expect the central bank to raise the rate that month.
The peso fell 0.3 percent to 11.7215 per U.S. dollar, paring its gain this year to 5.3 percent. It’s up 17 percent over the past two years.
The peso, which is driving down the cost of imports, and the government’s 100-billion-peso subsidy for fuel will help keep prices in check, said Rafael Camarena, an economist at Banco Santander SA in Mexico City. Banco Santander SA on July 7 cut its 2011 inflation forecast to 3.4 percent from 3.7 percent. Bank of America Merrill Lynch lowered its estimate on July 12 to 3.66 percent from 3.76 percent.
“We’re seeing very moderate internal demand,” Camarena said in a telephone interview. “There’s no evidence of pressure on the demand side.”
The economy may expand as much as 5 percent this year, after growing 5.4 percent last year, the most in 10 years, the central bank said on May 11.
The yield on the inflation-linked notes due in 2012 has dropped 79 basis points this year, according to data compiled by Bloomberg. Yields on fixed-rate bonds due the same year rose one basis point during the same period.
“The inflation bonds have performed well and this performance is likely to continue,” said Banorte-Ixe’s Padilla. “It’s a good strategy.”