Abe-Bernanke 1-2 Punch Pummeling World’s Top Carry TradeBen Bain and Jonathan Levin
Mexico’s peso is losing its status as the best carry-trade currency for Japanese investors as the Bank of Japan signals reluctance to boost stimulus while the Federal Reserve weighs curbing its asset purchases.
Investors who borrowed funds in Japan and then bought the peso to take advantage of Mexican interest rates that are about 40 times higher have lost 11 percent in the past month as the Latin American currency sank. That’s a reversal from the 20 percent return in the first four months of 2013, the biggest in emerging markets and the most among currencies tracked by Bloomberg after the Icelandic krona. Yields on Mexico’s benchmark bonds due 2024 rose 0.5 percentage point in the past month, the most since the 30-day period ended Dec. 14, 2010.
Three weeks after Fed Chairman Ben S. Bernanke spurred a global rout by saying policy makers could reduce quantitative easing, or QE, the BOJ’s decision to leave its lending program unchanged signaled it was reluctant to add more stimulus. Japanese mutual funds had boosted holdings of Mexican assets to a record to profit from a 19 percent surge in the peso in the first four months of the year as Prime Minister Shinzo Abe’s bid to revive economic growth sank the yen. The peso has retreated 12 percent against the yen in the past month.
“There’s this big snapback now,” Vivienne Taberer, who helps manage about $14 billion in emerging-market debt and currencies at Investec Asset Management, said by telephone from Cape Town. Mexico “has been one of the biggest emerging-market overweights, so there’s been quite a big shakeout of that. Some of that has been obviously funded out of the yen because the rates are so low, and the currency was so weak. So obviously that’s been the most painful cross to have been in.”
At $1.4 billion, sales of peso Mexican bonds sold to individual investors in Japan, known as uridashi, this year have already doubled the total in 2012, according to data compiled by Bloomberg. Holdings by Japanese mutual funds, known as toshins, of Mexican assets rose to a record high 364.4 billion yen ($3.86 billion) in May from 93.5 billion yen last August, according to Nomura Holdings Inc.
The peso touched a 4 1/2 year-high of 8.4085 yen per peso on May 10. The Mexican currency fell 1.9 percent to 7.4093 yen per peso on June 14.
The BOJ left unaltered on June 11 the one-year fixed-rate loan facility the bank has tapped seven times amid a surge in volatility during which yields have jumped from record lows, disappointing some investors. Abe and the BOJ have pledged to defeat 15 years of deflation by pumping as much as 70 trillion yen ($742 billion) a year of new money into the economy.
On June 14, the yen rallied further after minutes from the BOJ’s latest meeting showed one policy maker advocated restricting stimulus to a two-year period.
“Japan created a fire in its backyard, which basically means they threw kerosene on the fire that was already taking place here,” Alejandro Silva, who helps oversee $800 million in emerging-market assets at Silva Capital Management, said by phone from Chicago. “Instead of getting reassurance that perhaps there would be another central bank that would be providing quantitative easing in larger scale to accommodate for the fact that perhaps the Fed would taper, what you got was nothing of that nature.”
Yujiro Goto, a currency strategist at Nomura, says Mexico’s higher interest rates will continue to lure Japanese investors.
“In terms of May, Mexico was still a very popular investment decision for Japan in toshin or uridashi market,” he said by phone from New York. “That will not change so much in the near future.”
The extra yield investors demand to own Mexican government dollar bonds instead of U.S. Treasuries fell seven basis points, or 0.07 percentage point, to 190 basis points at 2:07 p.m. in New York, according to JPMorgan Chase & Co.
The cost to protect Mexican debt against non-payment for five years with credit-default swaps rose four basis points to 119 basis points, according to data compiled by Bloomberg. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower fails to adhere to its debt agreements.
The peso fell 1.2 percent to 12.8607 per dollar.
Yields on interbank rate futures contracts due in December, known as TIIE, fell three basis points last week to 4.30 percent.
Hedge funds and other large speculators cut bets that the currency would gain against the U.S. dollar to a net 63,774 on June 11, the least in 10 months, according to data from the Washington-based Commodity Futures Trading Commission.
“It was a crowded trade that was unwound because you had the Fed spooking a lot of people believing that quantitative easing would stay intact,” Silva said. “Secondarily, call it insult to injury, the Japanese just didn’t really come through with what the market had just sort of hoped would be a larger stimulus plan.”