South Of The Border, Rates Have Headed North

Sitting on a pile of cash, waiting for Mideast smoke to clear and markets to get their bearings? If so, you might consider parking some of it in Mexican pesos.

Sound crazy? It sure does to people who got burned nine years ago, when Mexican President Jose Lopez Portillo "pesoized" dollar accounts in the country. Back then, many American retirees living in Mexico and earning terrific interest woke up to learn that their dollars had been converted to pesos, and worse, that they'd been ripped off on the exchange rate. Now, precisely because of fears that history could repeat itself, Mexico has to pay out top interest rates to attract capital.

SLOW SLIDE. Mexican brokerages are offering a whole menu of peso-denominated money-market funds paying more than 20% a year. The government has programmed the peso to slide only 5% against the dollar this year. That means you should get a dollar yield in the high teens.

Probursa, with a New York branch (212 949-8855), offers the Progresa fund, paying 22%, and Produce, a less liquid fund yielding 1.5 points more. Accounts start at $25,000. Operadora de Bolsa (212 986-5551) markets similar funds, with a minimum deposit of 40 million pesos, or $13,500. Each fund pays about 22%.

To open an account, you must show proof of citizenship and fill out a contract. The firm takes your money, changes it to pesos, and wires it to Mexico. The paperwork takes a couple of days. You can usually cash out on 24 hours notice. If the brokerage takes a dive, the Mexican government guarantees your principal. Mexico doesn't tax the earnings, but they must, of course, be reported on your Form 1040.

HONOR BRIGHT. Keeping Mexican rates up are the fears that the economy will stumble and that Carlos Salinas de Gortari's government will have to devalue the peso more than planned. A crash in the oil market could also sink confidence in Mexico.

But the government hasn't broken any money promises in years. Foreign reserves are high, buffering the peso. The budget is nearly balanced, and Mexico has a multibillion-dollar contingency fund for an oil crash. Most important, the fate of Salinas' economic program hinges on investor confidence. Things would have to get pretty ugly before they let the the peso weaken drastically."We consider the peso-devaluation risk negligible at least through July," before mid-summer elections, says Peter Albano, a Mexico-watcher at Salomon Brothers in New York.

If you're still nervous, Mexico City's Zenit brokerage (011-525-540-5091) is now offering dollar-hedged funds. Zenit buys options on the dollar in order to protect the funds against a bigger-than-anticipated peso decline, taking a fee in the process. The funds are currently yielding about 17%.