Peru Bond Yields Match 2013 High on European Concern; Sol Slips

Peru’s bond yields rose to match their highest level this year as the election stalemate in Italy renewed concern about Europe’s ability to deal with its debt crisis, diminishing demand for higher-yielding assets.

“It’s external events and the volatility caused by the outcome of the Italian elections,” Felipe Hernandez, an economist at Royal Bank of Scotland Group Plc, said by phone from Stamford, Connecticut. “Foreign investors hold more than half of the total amount outstanding of the local bonds, so while those holdings have been resilient, they are more vulnerable to changes in global sentiment than others in the region.”

Yields on Peru’s 7.84 percent bonds due in 2020 increased 10 basis points, or 0.10 percentage point, to 3.89 percent, matching the high for 2013 touched on Jan. 8. Foreign investors held 69 percent of the Peru bonds due in 2020 at the end of January, according to Finance Ministry data.

Peru will auction tomorrow at least 800 million soles ($310 million) of bonds due in 2023 and 2042, the Finance Ministry said today on its website. The ministry may sell as much as 1.3 billion soles of bonds and has the option of selling extra bonds in a second round should demand exceed the amount offered by 25 percent or more. If investors place orders for more than twice the amount of bonds offered, the government may increase the offering by 50 percent to 1.95 billion soles.

In a decree published yesterday in its official gazette, Peru said it would pay back as much as $1.68 billion of debt it owes the Inter-American Development Bank and the World Bank. The repayment will be offset by new borrowing in soles.

The sol depreciated less than 0.1 percent to 2.5845 per U.S. dollar, according to data compiled by Bloomberg.

The dollar climbed on demand for a refuge after Italy’s deadlocked elections signaled the world’s third-largest debtor may not continue with cost-cutting reforms. The stalemate threatens to derail 15 months of austerity under Prime Minister Mario Monti’s government, reviving speculation the country will struggle to pay its debt.

Before it's here, it's on the Bloomberg Terminal.