Bloomberg News

Cetes Demand Rebounds on U.S. Growth Speculation: Mexico Credit

July 13, 2011

July 13 (Bloomberg) -- Investor demand for Mexican government bills is jumping from a 16-month low on speculation a rebound in the U.S. economy, the Latin American country’s biggest trading partner, will fuel gains in the peso.

Cetes, as the 91-day securities are known, drew bids of 24.6 billion pesos ($2.1 billion), or 3.8 times the 6.5 billion pesos offered in yesterday’s auction, the central bank said on its website. The bid-to-cover ratio, a gauge of demand that measures the number of bids divided by bids accepted, was 3.1 times last week, the lowest since January 2010. The zero-coupon bills yield 4.3 percent, up from 4.29 percent a week ago and 428 basis points, or 4.28 percentage points, more than similar- maturity U.S. government debt.

Investors are betting a pickup in U.S. growth in the second half of the year will fuel demand for Mexico’s exports, pushing up the peso from an almost three-month low and bolstering dollar-based returns on local assets. The U.S. buys about 80 percent of Mexico’s exports. Industrial production in Latin America’s second-biggest economy after Brazil rose 4.6 percent in May from a year earlier, more than the median estimate for a gain of 3.7 percent from 12 analysts surveyed by Bloomberg.

“Mexican fundamentals are good,” Javier Belaunzaran, who helps manage about 40 billion pesos at Interacciones Casa de Bolsa SA in Mexico City, said in a telephone interview. “Sooner or later, the exchange rate will strengthen.”

The peso will gain 1.6 percent to 11.60 per dollar by the end of the year, according to the median estimate of 23 analysts in a Bloomberg survey. The currency is down 2.1 percent since July 8, when a report showed the U.S. unemployment rate unexpectedly climbed to 9.2 percent. The peso touched 11.9579 yesterday, near the lowest level since March 28. The slump is curbing a 5 percent rally this year.

Growth Forecasts

The world’s biggest economy will expand more than 3 percent in the second half of the year after growing about 2 percent in the first half, according to the median forecast of 80 economists in a Bloomberg survey.

Mexico’s economy will grow as much as 5 percent this year after expanding 5.4 percent in 2010, the fastest pace in a decade, according to the central bank. The spread on Mexican zero-coupon bills over similar-maturity U.S. notes has shrunk to 428 basis points, or 4.28 percentage points, from 443 basis points on May 23.

Hedge funds and other investors boosted their bullish bets on the peso by the most in nine months on July 5, 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 82,944 contracts last week.

‘Good Time’

Foreign investors’ holdings of Cetes rose to 31 percent of the outstanding bills on July 1, the highest since June 14, according to the central bank.

“This is a better entry point for investors than last week,” Alejandro Urbina, who helps manage about $800 million in investments at Silva Capital Management Llc in Chicago, said in a telephone interview. “It’s a good time to get in on the trade from the point of view of a foreign investor.”

A deepening slump in the peso may curb demand for Cetes, said Benito Berber, a strategist at Nomura Securities Inc. in New York. Concern the debt crisis is spreading in Europe has reduced demand for higher-yielding emerging-market assets, helping push the peso lower.

“If the Mexican peso goes to 12, then we could see some foreigners start leaving their positions, but we’re kind of far away from that scenario,” Berber said in a telephone interview. “If the expectation is that this bout of risk aversion is going to continue, then people might want to stay away from anything that’s considered risky.”

Yield Spread

The extra yield investors demand to hold Mexican government dollar bonds instead of U.S. Treasuries narrowed eight basis points to 139 basis points at 7:47 a.m. New York time, according to JPMorgan Chase & Co.

The cost to protect Mexican debt against non-payment for five years was little changed at 114 basis points yesterday, 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.

Yields on futures contracts for the 28-day TIIE interbank rate due in February rose 1 basis point to 5.02 percent, indicating traders expect the central bank to raise the rate that month. Policy makers held the lending rate at a record low 4.5 percent on July 8, the only major Latin American country to keep borrowing costs unchanged in the past year.

Annual inflation slowed to 3.28 percent in June and reached a five-year low of 3.04 percent in March.

“The Cetes are pretty interesting because you aren’t seeing the pressure to raise rates and you have a very good return,” Silva Capital’s Urbina said. “Cetes are a great instrument to be in if you are waiting for the global uncertainty to pass.”

--With assistance by Bryan Gibel in New York. Editors: Lester Pimentel, Jonathan Roeder.

To contact the reporter on this story: Andres R. Martinez in Mexico City at amartinez28@bloomberg.net

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


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