Japanese individuals are following Bill Gross’s lead, boosting their holdings of Mexican debt fivefold to profit from the Latin American country’s higher interest rates and the peso’s record rally.
Mexican peso bonds sold to individual investors in Japan, known as uridashi, surged 443 percent last year, the most among emerging markets, to $552.1 million, according to data compiled by Bloomberg. That’s more than the 72 percent increase for Turkish lira-denominated securities and compares with a 27 percent plunge for debt in Brazilian reais.
Faced with yields on 10-year bonds of less than 1 percent, Japanese investors are turning to Mexico, where interest on comparable securities is 4.57 percentage points higher and the peso’s 8.4 percent gain was the biggest among major currencies tracked by Bloomberg. Mexico’s 10-year bond yields fell 1.13 percentage points last year as foreigners led by Pacific Investment Management Co.’s Gross poured a record $8.78 billion into the country’s debt, according to EPFR Global.
“Investing in Mexico makes sense for Japanese retail investors,” Yujiro Goto, a currency strategist at Nomura Holdings Inc., said by phone from New York. “Diversification will continue this year from the Brazilian real or Turkey.”
Pimco spokesman Mark Porterfield said company officials weren’t available to comment on demand from his company and from Japanese investors for peso-denominated bonds.
Overseas funds bought $238 million of Mexican peso bonds from Jan. 3 to Jan. 9, the biggest weekly increase ever for the Latin American country and the most in emerging markets tracked by EPFR Global over the period.
Gross, Pimco’s co-chief investment officer, said on Dec. 13 that Mexico’s bonds are “attractive” because they offer higher yields. Pimco is the biggest individual holder of fixed-rate government debt due in 2020, 2021, 2022 and 2024, according to data compiled by Bloomberg. The firm’s holdings helped push foreign investment in Mexico’s $144 billion fixed-rate peso bond market to 54.4 percent on Jan. 4, the highest proportion since February 2000, regulatory filings and central bank data compiled by Bloomberg show.
While Mexican peso-denominated uridashis posted a bigger increase, lira bonds sold to individual investors in Japan exceeded those for all other emerging markets last year as Turkish inflation slowed and Brazil fell out of favor amid tax increases and a weakening currency. Those investors are sometimes called “Mrs. Watanabe,” a reference to housewives who control family budgets.
The real sank 9 percent against the dollar last year, the biggest decline among major currencies after the yen.
While Turkish policy makers cut benchmark borrowing costs by a quarter-percentage point to a record 5.5 percent last month, Mexico’s central bank has kept its key rate unchanged at 4.5 percent since July 2009.
Brazil has lowered its overnight lending rate 3.75 percentage points to 7.25 percent in the past year, the most among Group of 20 nations. Japan’s main rate is 0.1 percent.
Mexico’s central bank “has been very predictable” while “Brazil is the opposite,” Pablo Cisilino, who helps oversee about $50 billion of emerging-market debt at Stone Harber Investment Partners, said in a telephone interview from New York. Brazil’s “economic policies have been very erratic.”
Declines in the Japanese currency have accelerated since the election last month of Prime Minister Shinzo Abe, who has pledged to increase monetary stimulus to weaken the yen and end deflation. It slid to 89.67 per dollar on Jan. 14, the weakest since June 25, 2010.
This year, the peso will rally 4.3 percent against the yen, the most in emerging markets after the South African rand and the Singapore’s dollar, according to the median forecast of analysts surveyed by Bloomberg.
“The depreciation of the yen is basically pushing investors away from the yen and to currencies that have much better technicals and fundamentals,” Roberto Sanchez-Dahl, who helps manage $1.5 billion in emerging-market debt as vice president of Federated Investment Management Co., said in a telephone interview from Pittsburgh. “The Mexican peso would be one of them.”
While Mexico’s “intervention-free” strategy makes the peso attractive to Japanese investors, it also poses a risk if the outlook worsens for the U.S. economy, Mexico’s biggest trading partner, according to Claudio Irigoyen, the head of Latin America fixed-income and foreign-exchange strategy at Bank of America Corp.
Treasury Secretary Timothy F. Geithner said this week that the U.S. faces severe economic hardship if Congress fails to raise the debt ceiling.
“Those guys are basically selling the yen and buying the Mexican peso,” Irigoyen said in a telephone interview from New York. “So you have a natural exposure also to global risk.”
The extra yield investors demand to own Mexican dollar bonds instead of U.S. Treasuries rose two basis points, or 0.02 percentage point, to 160 basis points at 8:17 a.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 increased one basis point to 97 basis points. Credit-default swaps pay the buyer face value in exchange for the underlying securities or cash equivalent if the issuer fails to comply with debt agreements.
The peso fell 0.4 percent to 12.6618 per dollar. Yields on Mexican interbank rate futures contracts due in December, known as TIIE, dropped four basis points to 4.87 percent yesterday.
Nomura’s Goto said that more than half of the peso- denominated uridashi sales last year took place in the final two months. The about 29 billion yen ($327 million) in issuance during November and December was the biggest amount since at least 2005 for a two-month span, according to Goto.
Issuance for peso-denominated uridashi is outpacing sales in lira and reais in 2013 and lags behind only debt in Russia rubles among emerging-market currencies this year with $116 million, according to data compiled by Bloomberg.
“Japanese retail investors need to enhance their income from financial products,” Goto said by telephone from New York. “The Mexican peso’s fundamentals look better than other currencies at this moment.”
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