Peruvian Yields Post Biggest Fall Since 2009 on Hedge Advantage

Peruvian bond yields registered their steepest two-day decline since 2009 as investors took advantage of the world’s lowest hedging costs to boost returns.

The yield on the nation’s 9.91 percent sol-denominated bond due May 2015 declined 38 basis points, or 0.38 percentage point, in the past two days to 1.58 percent, according to prices compiled by Bloomberg. The price rose 0.37 centimo today to 118.14 centimos per sol.

Implied yields on sol forwards, the cost to hedge against currency fluctuations, dropped last month after Peru raised banks’ dollar reserve requirements and stepped up purchases in the currency market, creating a scarcity of greenbacks. Though the sol has fallen 1.3 percent in the past month, investors expect the currency to rebound and are drawn by the sol’s low volatility, said Alvaro Vivanco, a Latin American strategist in New York for Banco Bilbao Vizcaya Argentaria SA.

“You have a currency that’s structurally very attractive and there’s an arbitrage opportunity there so you have foreigners coming in and buying at the front end,” Vivanco said in a telephone interview. “Foreign participation in those bonds will get very high.”

The central bank said on its website it bought $300 million of U.S. currency today, the most in three weeks.

The sol was little changed at 2.5773 per dollar at today’s close, according to prices compiled by Bloomberg. The one-month implied yield on sol forwards is minus 1.47 percent, the lowest in the world.

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