World’s Best Carry Trade Spurs Buy Call on Colombia Bonds

Colombia is handing carry-trade investors the best returns in the world.

Investors who buy riskier assets with money lent from nations with lower borrowing costs have reaped a 9.47 percent gain in Colombia in the past three months as the central bank lifts interest rates and the peso appreciates the most of any currency. The nation’s local debt has returned 13.2 percent in dollars, more than double the average gain for emerging markets.

While Mexico surprised investors by cutting rates last week, Colombia increased benchmark borrowing costs for a second straight month in May to keep inflation in check as economic growth accelerates. With swaps indicating the central bank will raise rates by a full percentage point to 4.75 percent by year-end, Banco Bilbao Vizcaya Argentaria is recommending that investors snap up Colombian bonds due 2024.

“Colombia’s cycle calls for more rate hikes, opposite to a lot of these countries in the region,” Carolina Ramirez, a strategist at BBVA’s Colombia unit, said in a telephone interview from Bogota. “The carry trade is attractive.”

Central bank Governor Jose Dario Uribe declined to comment on economists’ rate forecasts in an e-mailed response to questions.

Policy makers voted unanimously on May 30 to boost the overnight lending a quarter-percentage point to a 14-month high of 3.75 percent. Their next meeting is on June 20.

‘Larger Returns’

The latest central bank survey published May 12 shows analysts expect annual inflation to accelerate to 3.19 percent by year-end, which would be the highest annual rate since June 2012. The economy will expand 4.5 percent this year after growing 4.3 percent in 2013, according to the median forecast in a Bloomberg survey.

The peso has jumped 8.9 percent against the dollar in the past three months, data compiled by Bloomberg show.

“Larger returns given the hiking cycle add to the peso’s strengthening trend,” Armando Armenta, an economist at Deutsche Bank AG, said by phone from New York. “Colombia’s peso bonds should continue outperforming in dollar terms.”

The peso will strengthen 1.3 percent to 1,850 per dollar within two months, he said. The currency gained 0.5 percent to 1,874.07 at 2:11 p.m. in New York.

Colombia may increase its dollar buying to curb the peso’s surge, President Juan Manuel Santos said yesterday in an interview on Caracol Radio. Finance Minister Mauricio Cardenas said last month the Treasury joined the central bank and started purchasing dollars.

At its March board meeting, the central bank pledged to buy as much as $1 billion from April to June.

Rate Outlook

“Its hard to see the peso gaining much more,” Camilo Perez, the head analyst at Banco de Bogota, said by phone from Bogota. “The margin for appreciation is reduced.” He predicts the peso will weaken to as low as 1,950 by the end of 2014.

Banco de la Republica will raise borrowing costs to 4.25 percent by year-end to tame inflation, BBVA’s Ramirez said. She predicts yields on Colombia’s 2024 bonds will fall to 6 percent by September from 6.28 percent.

“Colombia is lifting rates for the right reasons,” Ramirez said. “The economy is growing and the central bank needs to keep inflation under control.”