Japan’s Love Affair With Brazil Rekindled Ends Peso Fling

After a year-long obsession, Japanese investors are just not that into Mexico anymore.

Sales of peso-denominated bonds known as Uridashi have plunged this year, with just $199 million issued. That compares with sales of $1.8 billion in debt denominated in Brazilian reais. In 2013, the roles were reversed, with Mexico supplanting Brazil as Latin America’s most-popular destination for Japanese debt investors.

Frustrated by yields on Japanese government bonds that are close to zero, individuals are turning to Brazil, where interest rates of 11 percent are three times higher than in Mexico and the real is appreciating more than any other major currencies. Japanese households, which have about $16 trillion in assets, bought a record $2.96 billion of peso Uridashi last year.

“The interest rates story is still very important for the Uridashi market,” Yujiro Goto, a senior currency strategist at Nomura International Plc in London, said in a telephone interview. “For retail, who prefer high-yielding currencies always, the peso is less attractive than the Brazilian real.”

While Mexico has cut interest rates twice in the past year to a record low 3.5 percent to revive economic growth, Brazil has boosted borrowing costs to a two-year high of 11 percent to stem surging inflation. The peso’s 0.6 percent advance this year against the dollar compares with a 6.4 percent gain in the real that has been fueled in part by the Brazilian bank’s intervention efforts.

Yield Gap

Mexico’s benchmark peso bonds due in 2024 yield 5.88 percent, or 6.58 percentage points less than similar-maturity real bonds, according to data compiled by Bloomberg. The 12.5 percent return in dollars for local Brazilian debt this year is almost double that for Mexico, Bank of America Corp. indexes show.

Brazil’s higher-yielding debt is overshadowing Mexico’s credit-rating increases and prospects for faster growth following the passage of sweeping oil-law changes, said Alejandro Silva, a founding partner at Chicago-based Silva Capital Management LLC.

Moody’s Investors Service raised Mexico’s rating to a record high A3 in February, citing constitutional changes to open the country’s energy sector. The following month Standard & Poor’s cut Brazil’s credit rating one step to BBB-, the lowest level of investment grade.

‘Too Attractive’

“The yield in Brazil is just way too attractive,” Silva said by phone from Chicago. “That spread on the carry is so attractive to the Japanese investors they would just rather take the higher-yielding play.”

Mexico’s peso increased 0.4 percent to 12.9060 per U.S. dollar at 2:03 p.m. in New York.

Joe Kogan, the chief emerging-market strategist at Bank of Nova Scotia, said peso-denominated Uridashi issuance may outpace Brazil later this year as gains in the real slow.

The peso will rally 7.3 percent the rest of the year against the yen, the most among major currencies tracked by Bloomberg, while the real will slump 2.4 percent.

“To the extent that some of the inflows were driven by appreciation, that can’t last for that much longer,” Kogan said by phone from New York. “I imagine this could turn around eventually, especially since many people don’t think the real can get any stronger.”

Peso bonds gained 22 percent in yen terms last year, compared with a 6.2 percent advance in local Brazilian debt.

“Japanese investors have tended to be very opportunistic in their timing,” Silva said. “The weakened reais coupled with the attractive carry is too desirable to pass on.”

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