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Mexico Bonds Correlation to Treasuries Breaking on Carry Trade

The correlation between Mexico’s local bonds and U.S. Treasuries is turning negative for the first time in eight months as foreigners facing near-zero interest rates at home profit from the peso’s carry returns.

The 60-day correlation coefficient between 10-year Mexican government bonds and similar-maturity Treasuries fell to -0.04 today, the first negative reading since Aug. 2. A reading of 1 means the two securities move in lockstep while -1 indicates they move in opposite directions. Investors who bought the peso with funds borrowed in the U.S. have netted a 5.8 percent return in dollar terms this year, the best performance among the most-traded 16 currencies in the world.

“Probably what’s working more readily in Mexico is the carry trade and the need for yield,” Enrique Alvarez, the head of Latin America fixed-income research at IdeaGlobal in New York, said in a telephone interview. “When I’m talking about carry and yield, I’m talking about the yen trade essentially -- short the yen and long the peso. You need to park those funds somewhere, obviously that filters back into the bonos market.”

The peso slipped 0.4 percent against the yen today, paring its gain in 2013 to 19.8 percent. Mexico’s currency declined 0.1 percent against the dollar, paring its advance this year to 4.7 percent.

Investors who bought the peso with funds borrowed in the Japan have netted a 21.1 percent return in yen terms this year, the best performance among the most-traded 16 tenders against the national currency of the world’s third-biggest economy.

Yields on benchmark Mexico peso bonds due in 2024 tumbled three basis points, or 0.03 percentage point, to 4.58 percent, a record-low close, according to data compiled by Bloomberg.

Mexico has been benefiting from a surge in inflows from Japanese investors seeking higher-yielding assets. Japanese Finance Minister Taro Aso said last week that his nation’s policies went unopposed at the Group of 20 meeting in Washington, signaling further weakening of the yen as the central bank pushes ahead with stimulus measures. Investment in Mexico from Japanese mutual funds, known as Toshins, almost tripled in the seven months through March to a record 268 billion yen ($2.7 billion), according to Nomura Holdings Inc.

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