Bloomberg News

Foreigners Cut Cetes Holdings to Six-Month Low: Mexico Credit

June 29, 2011

June 29 (Bloomberg) -- Foreign investors are reducing their holdings of the shortest-term Mexican government bills to a six- month low as slowing U.S. growth fuels a slide in the peso.

International investors held 138.5 billion pesos ($11.7 billion) of the securities, known as Cetes, as of June 17, down 23 percent from the previous week and the lowest level since Jan. 13, according to the central bank. Cetes due in 28 days yield 4.33 percent, compared with -0.005 percent for similar- maturity U.S. Treasuries, data compiled by Bloomberg show.

Speculation the flagging economic expansion in the U.S. will erode demand for Mexico’s exports is making the peso the worst-performing currency in Latin America this month. Mexico’s economy, which sends about 80 percent of its exports to the U.S., grew 2.4 percent in April from a year earlier, the slowest pace since November 2008, the national statistics agency said yesterday.

“The peso was sold off as concern about the U.S. growth became more evident,” Gorky Urquieta, who oversees about $15 billion of emerging-market assets at ING Investment Management in Atlanta, said in a telephone interview. “As the U.S. data deteriorates, this is one of the first things people look to unwind.”

The peso fell 1.6 percent this month to 11.7537 per U.S. dollar, paring its advance this year to 5 percent, according to data compiled by Bloomberg. The yield difference between Mexican peso bonds due in 2020 and similar-maturity Treasuries has widened 7 basis points to 371 this year.

Bullish Bets

Hedge funds and other investors are cutting their bullish bets on the peso to the lowest level since September, according to the Commodity Futures Trading Commission. Wagers on the peso strengthening against the dollar outnumbered bets on a decline in the futures market by 41,423 contracts last week, less than one third of the record 134,129 set in April.

Foreigners boosted their holdings of Cetes to a record 204 billion pesos in March from 27 billion pesos in September to tap into the peso’s rally and a higher-yielding alternative to U.S. debt, said Javier Belaunzaran, who helps manage about 40 billion pesos at Interacciones Casa de Bolsa SA in Mexico City, in a telephone interview.

“This exercise is losing a little steam,” Belaunzaran said.

Investors will be drawn back to Cetes as inflation remains in check and the Federal Reserve holds off on raising interest rates, said Alejandro Padilla, a debt strategist at Grupo Financiero Banorte-Ixe in Mexico City.

Inflation slowed to 3.2 percent in the 12 months through mid-June and reached a five-year low of 3.04 percent in March. Prices rose 3.6 percent in the U.S. in May, more than the median estimate for a gain of 3.4 percent.

Rate Outlook

The Fed will keep the overnight benchmark lending rate between zero and 0.25 percent for at least two or three more policy meetings, Fed Chairman Ben S. Bernanke said on June 22. Traders in the rate-futures market are betting Mexican central bank Governor Agustin Carstens will wait until January to raise borrowing costs. Policy makers held the lending rate at a record low 4.5 percent last month, the only major Latin American country to keep borrowing costs unchanged in the past year.

“The Federal Reserve will maintain its monetary policy for at least eight months and Banxico will stay put until next year,” Padilla said in a telephone interview. “We have very good inflation figures. From now on, we will continue to see foreigners with strong appetite for Cetes.”

Default Swaps

A central bank press official didn’t return a call for comment.

The extra yield investors demand to hold Mexican government dollar bonds instead of U.S. Treasuries narrowed 11 basis points to 125 at 5 p.m. New York time, according to JPMorgan.

The cost to protect Mexican debt against non-payment for five years fell two basis points to 111, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.

The peso rose 0.5 percent today.

Yields on the 28-day interbank rate futures due in January, known as TIIE, fell 2 basis points to 4.97 percent.

Federal Reserve officials last week cut their 2011 and 2012 growth forecasts for the U.S. economy. The world’s biggest economy will expand by 2.7 percent to 2.9 percent this year, down from April’s forecasts of 3.1 percent to 3.3 percent, based on the median range of projections.

“If you have potentially a big U.S. slowdown, the Mexican economy will get hit,” said ING Investment’s Urquieta. “You tend to see a bit of reaction to that.”

--Editors: Lester Pimentel, Jonathan Roeder

To contact the reporters on this story: Andres R. Martinez in Mexico City at; Ye Xie in New York at

To contact the editor responsible for this story: David Papadopoulos at

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