Pimco-Led Peso Bulls Cheer One-and-Done Rate Cut: Mexico CreditBen Bain and Eric Martin
Foreign investors banking on currency gains to amplify their Mexican debt returns can breathe easier after the central bank signaled its first interest-rate cut since 2009 would be a one-time reduction.
The peso jumped 1 percent in the biggest advance since Jan. 2 after the bank lowered its benchmark rate by a half-percentage point to 4 percent. The currency’s gain boosted returns on Mexico’s peso-denominated government bonds to 6.6 percent this year in dollar terms, six times the average in emerging markets, according to Bank of America Corp.
Policy makers led by central bank Governor Agustin Carstens said the rate cut “doesn’t represent the start of a cycle,” bolstering confidence the bank will keep rates on hold for now and reducing the likelihood looser monetary policy will erode the allure of local-currency debt for foreigners. Mexico’s bond market attracted a record $8.78 billion last year from overseas investors tracked by EPFR Global as they sought to profit from steady interest rates and growth that outpaced Brazil’s for a second year.
“It’s not the beginning of an easing cycle,” Claudio Irigoyen, the head of Latin America fixed-income and foreign-exchange strategy at Bank of America, said in a telephone interview from New York. “You had a rally in the currency because people said, ‘OK, this is a one-off and therefore the cut story is out of the way.’”
Bill Gross, Pacific Investment Management Co.’s co-chief investment officer, said last month the peso was a “great currency” while praising the nation’s low debt level and interest-rate stability. Pimco is the biggest owner of peso bonds due in 2020, 2021, 2022 and 2024, according to data compiled by Bloomberg.
E-mail and voice messages left today with Pimco’s press office weren’t immediately returned.
Yields on bonds due in December fell five basis points, or 0.05 percentage point, to a record 4.11 percent on March 8, according to data compiled by Bloomberg. The peso’s 1 percent rally pushed it to 12.6279 per dollar, its strongest close since Feb. 1.
Mexico trimmed rates for the first time in more than three years after signaling in January that slowing inflation made loosening monetary policy “advisable.” While 21 of 22 analysts in a survey released last week by Citigroup Inc.’s local Banamex unit expected a rate reduction this year, the median estimate was for a 0.5 percentage point cut in April.
Carstens’s first rate cut was forecast by seven of 25 analysts in a Bloomberg survey. The rest predicted the rate would stay on hold. Latin America’s second-largest economy was the only nation in the Group of 20 to leave borrowing costs unchanged and refrain from buying bonds to ease monetary conditions since July 2009.
Cost-of-living increases have been below the 4 percent ceiling of the central bank’s target range for three straight months, with the rate at 3.55 percent in the year through February. In its policy statement, the bank said the cut shouldn’t prevent inflation from slowing to the bank’s target of 3 percent. Its target range is one percentage point below and above the central target.
Alberto Bernal, the head of fixed-income research at Bulltick Capital Markets in Miami, said the rate cut hasn’t shaken his bullish outlook on Mexican peso debt and predicts that the currency will appreciate further.
“What I’m recommending to my clients, is to go aggressive into the long end of the curve,” he said by telephone.
Yields on Mexico’s benchmark bonds maturing 2024 increased five basis points, or 0.05 percentage point, to 5.01 percent on March 8, according to data compiled by Bloomberg. Yields on the country’s longest-dated peso bond, those maturing in 2042, surged nine basis points to 6.02 percent.
Enrique Alvarez, the head of Latin America fixed-income research at IdeaGlobal in New York, said investors in longer-maturity bonds may have sold their debt on March 8 on concern that lower borrowing costs will accelerate inflation and erode returns.
“By lowering rates you’re exposing higher inflation jolts further ahead,” he said in a telephone interview. The rate cut also means “you have less elements that are going to support a stronger peso.”
The extra yield investors demand to own Mexican dollar bonds instead of U.S. Treasuries rose one basis point to 170 basis points at 12:06 p.m. in Mexico City, according to JPMorgan Chase & Co.’s EMBIG index.
Mexico’s peso increased 0.8 percent to 12.5238 per dollar. It earlier touched 12.5101, the strongest intraday level since September 2011.
The cost to protect Mexican debt against non-payment for five years with credit-default swaps dropped four basis points to 90 basis points, according to data compiled by Bloomberg. Yields on interbank rate futures due in December, known as TIIE, rose one basis point to 4.46 percent.
Bernd Berg, a currency strategist at Credit Suisse Group AG in Zurich, said lower borrowing costs will help boost domestic growth and ultimately support the peso’s appreciation.
“Mexico’s growth rates will outperform other regional players like Brazil,” Berg said in an e-mailed response to questions. “Strong U.S. data in combination with domestic growth boosted by the rate cut are supportive for peso appreciation as capital flows will continue to flow in.”