A Bond Trader in Chicago Just Dumped 95% of Firm’s Mexico Debt

  • Silva Capital said it slashed peso-debt holdings last week
  • Peso is the worst-performing Latin America currency in May

Fed up with Mexico’s plunging currency and lack of central-bank action to stop it, Silva Capital Management dumped 95 percent of its peso-denominated bonds.

“Mexico’s central bank has said absolutely nothing to lend support to the peso,” said Alejandro Silva, a money manager who helps oversee $180 million in assets for his Chicago-based firm. The fund, which held more than half of its assets in fixed-rate bonds known as Mbonos, disposed of almost all of them last week, he said.

Silva isn’t alone. Foreign investors have cut their holdings of Mexico’s shortest-term debt to an almost four-year low as the 7.1 percent tumble in the peso this month sparks losses. The local-currency bonds have slumped 8.7 percent in dollar terms during May alone, more than three times the average for developing nations.

After unprecedented government measures to shore up the peso in February, Mexico has stood pat this month. The exodus of overseas bond investors is emerging as a risk to the financial system, according to BNP Paribas SA. The central bank would have to make a “considerable change” in its main interest rate to stop speculators from betting against the currency, BNP said.

In February, Mexico unexpectedly unveiled a series of coordinated moves -- including raising rates in an unscheduled policy decision -- to bolster the peso after it sank to a record low. The currency soared as much as 11 percent in the ensuing months only to start depreciating again in recent weeks amid signs U.S. economic growth is slowing.

Ricardo Medina, a spokesman for the central bank, declined to comment on investor reaction to currency intervention and monetary policy.

Kevin Daly, who helps manage $11 billion of emerging-market debt at Aberdeen Asset Management Plc, said the worries about foreigners pulling out of Mexico are overblown. 

"You’d have to see a period of prolonged outflows before you could start getting concerned about that," he said. “We already have Mbonos. We own them and we’re not looking to sell here.”

The peso rose 0.7 percent to 18.351 per dollar at 8:35 a.m. in Mexico City.

Silva said he’ll avoid peso bonds as long as conditions remain volatile and policy makers remain on the sidelines. The firm still owns dollar-denominated bonds from Mexico and is studying whether to buy dollar debt from the state oil producer.

“They played chicken with the market, and the market is calling their bluff,” Silva said, referring to the central bank. "Let’s see what they do now. It’s no longer the exchange rate that’s reflecting a more negative vision of Mexico. It’s been transferred to the fixed rate-local market. We prefer not to be exposed.” 

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