Bloomberg News

Peru Bonds Rebound as Credit Suisse Recommends Buying Debt

June 07, 2011

June 7 (Bloomberg) -- Peruvian dollar bonds gained as Credit Suisse AG and RBS Securities Inc. recommended the notes after the debt tumbled yesterday following the election of ex- military rebel Ollanta Humala.

The extra yield investors demand to own Peruvian bonds instead of U.S. Treasuries declined 17 basis points, or 0.17 percentage point, to 197 at 5:51 p.m. in New York, according to JPMorgan Chase & Co. The yield gap soared 23 basis points yesterday, the biggest one-day jump since May 2010, on concern that Humala will fulfill pledges he made early in the presidential campaign to boost government control of natural resources and increase mining royalties.

Humala, 48, who defeated congresswoman Keiko Fujimori, 36, in the June 5 run-off vote, sought late in the campaign to distance himself from those comments, saying he would emulate the pro-market policies of former Brazilian President Luiz Inacio Lula da Silva. Peru’s economy expanded more than 7 percent in each of the past 13 months and it has been the fastest growing in Latin America over the past decade.

“You have to put things into the context of where Peru fundamentals are,” Pablo Cisilino, who helps manage $24.5 billion in emerging market debt at Stone Harbor Investment Partners in New York, said in an interview. “Even if Humala started doing some less market friendly policies, there’s not going to be an immediate deterioration of the credit.”

Peruvian stocks also rebounded today, with the benchmark index climbing 7 percent after a record 12 percent tumble yesterday that prompted exchange officials to end trading early. The sol strengthened 0.1 percent to 2.7865 per U.S. dollar, after falling 0.9 percent yesterday, the most in almost two years.

Borrowing Costs

The yield on Peru’s benchmark dollar bonds due in March 2037 fell 12 basis points to 5.806 percent today, after jumping 19 basis points yesterday, the most since November 2008.

’’It’s clear that there’s a willingness to buy here on weakness,’’ said Siobhan Morden, an emerging markets debt strategist with RBS Securities in Stamford, Connecticut. ’’If you believe that Peru will not lose its investment-grade rating, eventually it will retrace back for a full recovery.’’

The South American country’s credit fundamentals are “so unbelievably strong” that there’s room for further upgrades to the dollar debt, which Moody’s Investors Service rates Baa3, the lowest investment grade, Patrick Esteruelas, a senior analyst at the ratings company said yesterday.

“A lot has to go wrong to jeopardize Peru’s investment- grade rating,” he said by phone from New York.

Peru is rated BBB- by Standard and Poor’s and Fitch Ratings, also the lowest investment grades.

Debt Insurance

The cost to protect Peru’s debt from non-payment with credit-default swaps for five years fell 13 basis points today to 154 in New York, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Yesterday, the swaps jumped 20 basis points.

Before Humala began advancing in pre-election polls, the cost for debt insurance was in line with other investment-grade countries in the region including Brazil, Panama and Colombia.

The price of the swaps will decline to 110, close to the level before the presidential election in mid-March, said Diego Donadio, a Latin American strategist at BNP Paribas in Sao Paulo.

“We believe that Humala will not be that disruptive for markets,” he said by phone. “The economic advisers, the names that are being rumored that’ll assume the ministry of finance, the central bank are market friendly and moderate names.”

Central Bank

Humala may decide to keep Julio Velarde as head of the country’s central bank, Bank of America-Merrill Lynch said in a report today. Another candidate to replace Velarde, former bank President Oscar Dancourt, poses more risk due to his “interventionist” stance favoring capital controls and taxing inflows, Bank of America said.

Changes at the central bank may take place in September, the bank said. A divided Congress and Peru’s fiscal sustainability law will make it difficult for Humala, a one-time ally of Venezuela’s Hugo Chavez, to institute any “radical” changes at the outset of his government, according to Bank of America.

Humala said on June 5 he would seek broad backing for his policies and form a government comprised of the most-qualified people independent of their political affiliation. To reinforce his ties with Latin America’s biggest economy, Humala plans to travel to Brasilia and meet with Lula’s successor, Dilma Rousseff, before taking office July 28, Marco Aurelio Garcia, a foreign policy adviser to the Brazilian leader, told reporters yesterday.

Silver, Copper and Zinc

“The new president is likely to end up opting for policy prudence and he is taking over an economy that is in very good shape,” Credit Suisse analysts said in a report to clients.

Peru is the world’s biggest silver producer, and third in copper and zinc. Mining investment helped bring in $7.3 billion in foreign direct investment last year.

As an army lieutenant colonel in 2000, Humala led 50 soldiers who seized and occupied for a week one of Southern Cooper Corp.’s mines to protest corruption in Fujimori’s government. His brother, Antauro Humala, is in jail for killing four policemen during the takeover of a highland town in 2005.

“There’s a clear willingness to provide Peru the benefit of the doubt,” Morden said in a telephone interview. “It’s a view itself on the credit, not on the person.”

--With assistance from John Quigley, Helen Murphy and Joshua Goodman in Lima and Abigail Moses in London. Editors: Brendan Walsh, Richard Richtmyer

To contact the reporters on this story: Benjamin Bain in New York at bbain2@bloomberg.net; Belinda Cao in New York at lcao4@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net


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