Traders Backing BofA Bond Call Shows Growth Bets: Mexico Credit

Traders in Mexico’s government bonds are joining Bank of America Corp. in predicting a revival in economic growth.

The premium that investors demand to own 10-year peso notes instead of those due in five years has decreased to 1.11 percentage points from a four-month high of 1.32 percentage points on July 2, data compiled by Bloomberg show.

Bank of America says the yield gap will narrow further as energy-law changes lure foreign investment while faster U.S. growth bolsters the expansion in Latin America’s second-biggest economy. The growth pick-up may prompt the central bank to lift its key interest rate from a record-low 3 percent, leading to a faster increase in short-term debt yields, said John Welch, macro strategist at Canadian Imperial Bank of Commerce.

“It’s reasonable to put a flattener on if you think that economic activity is at all going to pick up,” Welch said by telephone from Toronto. Shorter-term bonds are “going to underperform the closer we get to any kind of tightening.”

The national statistics agency will report on Aug. 21 that Mexico’s economy grew 2.5 percent in the 12 months through June, the median estimate of analysts surveyed by Bloomberg. The annual pace of growth was 1.41 percent in May.

Energy Laws

Mexico President Enrique Pena Nieto enacted bylaws last week to guide an overhaul of the energy industry that the government estimates will boost Mexico’s gross domestic product by one percentage point annually by 2018. The reforms may add $20 billion to foreign-direct investment as soon as 2015, Bank of America Corp. has said.

The peso strengthened 1.3 percent last week, its biggest weekly advance in eight months. The currency added 0.2 percent today to 13.0479 per dollar as of 2:43 p.m. in New York.

In the U.S., the destination for about 80 percent of Mexico’s exports, employers added more than 200,000 jobs in the U.S. for a sixth month in July, the longest such period since 1997, a Labor Department report showed earlier this month.

Yields on Mexico’s 10-year notes have fallen 0.17 percentage point this month. Those on notes due in five years have fallen 0.03 percentage point in the same span.

Since June, Bank of America has been recommending that traders sell five-year securities in Mexico and buy 10-year bonds while buying five-year U.S. Treasuries and selling 10-year notes from the U.S. He said Mexico’s curve is likely to flatten as investors become less concerned about geopolitical turmoil that has reduced demand for higher-yielding securities.

“The long end of the curve is too steep,” said Claudio Irigoyen, Bank of America’s head of of Latin America fixed-income and foreign exchange strategy. “We are recommending trades that express that view.”

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