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Barclays Detects Unseen Threat to Foreign Holders: Mexico Credit

Barclays Detects Unseen Threat to Foreign Holders: Mexico Credit

Posted by Diego Hidalgo on March 02, 2015

(Bloomberg) -- Barclays Plc’s bearishness on the Mexican peso is highlighting a growing threat to foreign investors in the nation’s local-currency bonds.

Marco Oviedo, Barclays’s chief Mexico economist, envisions the peso sinking this year to 15.5 per dollar, just shy of the record low of 15.57 reached during the depths of the financial crisis in 2009. Among the more than dozen banks in a Bloomberg survey, no one is more pessimistic. 

In fact, the consensus pegs the peso as the only major currency that will appreciate against the greenback this year. 

 

If Oviedo’s right, that portends more losses for Mexico’s overseas bondholders, who are already reeling from the peso’s plunge as the collapse of oil and the prospect of higher U.S. interest rates lead investors to pull out of emerging markets. 

“The peso will continue under pressure,” he said by telephone from Mexico City. “Mexican local-currency bonds could be harmed by the depreciation.” 

Peso-denominated debt has lost 6.1 percent in dollar terms over the past three months, versus an average drop of just 0.9 percent for developing nations. The currency’s decline is starting to fan inflation, which may pressure the central bank to raise rates and further imperil the bonds, Oviedo said. 

Currency Weakness 

The peso fell to a six-year low of 15.0896 last week and lost 0.3 percent to 14.9891 per dollar as of 1:21 p.m. in New York. A basket of 20 currencies has fallen 12 percent against the dollar in the past six months as speculation builds that the Federal Reserve will increase U.S. borrowing costs. 

Economists project both the U.S. and Mexico will raise rates in the third quarter, based on a Bloomberg survey. 

Traders boosted bets for a rate increase in Mexico to an eight-month high on Feb. 17 after the central bank said the peso’s weakening could spur inflation. 

“If the peso is depreciating a lot and rates are starting to behave too erratically, then Banxico could start raising rates before the Fed,” Oviedo said. 

Gerardo Rodriguez, a former deputy finance minister who’s now a money manager at BlackRock Inc., said he continues to favor Mexico’s local-currency bonds because they offer attractive yields, and the nation’s energy-industry reforms will help strengthen the economy in the years ahead. 

‘Look Attractive’ 

Investors who are bullish on the bonds can use futures and swaps to shield themselves from currency fluctuations, he said. 

Mexico’s bonds due in December 2024 yield 5.63 percent, 3.62 percentage points more than similar-maturity U.S. Treasuries. 

Mexico “continues to look attractive,” Rodriguez said from San Francisco. “There are not that many places where you can find these types of yields with so much liquidity.” 

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