Bloomberg News

Worst Peso Slump Since ’08 Sparking Bond Losses: Mexico Credit

September 29, 2011

Sept. 29 (Bloomberg) -- Mexico’s peso is posting its worst quarter in three years on concern Europe’s financial crisis will exacerbate a slowdown in the U.S. economy, the destination for 80 percent of the Latin American country’s exports.

The peso’s 13.6 percent tumble against the dollar from the end of June through yesterday is the biggest since the three- month period ended December 2008 and the most among major currencies after the Brazilian real and South African rand. The currency’s plunge handed investors in peso bonds a loss of 8.3 percent in dollar terms this quarter, compared with an average decline of 5.7 percent in local-currency emerging-market debt tracked by Bank of America Corp.

Speculation the global economic deceleration will curb exports from developing countries is helping fuel a sell-off in emerging-market currencies that’s eroding dollar-based returns for bond investors. The losses in the peso may worsen after investors last week turned the most bearish against the currency since October 2009, according to the Commodity Futures Trading Commission.

The peso “is at its core a U.S. and to a great extent a global growth play,” Mike Moran, a currency strategist at Standard Chartered Bank in New York, said in a telephone interview. “Clearly in the past couple of weeks we’ve seen a major downgrade in the market’s assumptions for the macro- outlook for the next 12 months compounded by the concerns of a euro-zone debt crisis spinning out of control.”

Yields Jump

Yields on Mexican government peso bonds due in 2024 jumped 38 basis points this month, or 0.38 percentage point, to 6.74 percent, heading for the biggest monthly increase since November 2010, according to data compiled by Bloomberg. Yields on Brazil’s real-denominated securities maturing in 2021 rose six basis points during the same period to 11.72 percent. Ten-year U.S. Treasury yields sank 24 basis points this month to 1.98 percent and touched a record low of 1.6714 percent on Sept. 23.

The peso fell to 14.1395 per dollar on Sept. 23, its weakest level in more than two years, and is down 9 percent this year, according to data compiled by Bloomberg.

Foreign investors are selling the peso and buying dollars to hedge against losses in local Mexican bonds, exacerbating the currency’s decline, said Flavia Cattan-Naslausky, a currency strategist at RBS Securities Inc. in Stamford, Connecticut. International investors hold about 40 percent of local fixed- rate peso bonds, known as Mbonos, according to central bank data.

‘Ultimate’ Hedge

Bets on Mexico’s currency weakening against the dollar outnumbered those on its appreciating by 16,890 contracts last week, the most since October 2009, according to the Washington- based CFTC.

“It becomes the ultimate market hedge where you’re exposed in fixed-income, whether it’s Mexico or Brazil and you hedge that position,” Cattan-Naslausky said.

Citigroup Inc.’s Mexico City-based Banamex unit cut its 2011 year-end forecast for the peso to 13.2 per dollar from 11.9 and its 2012 projection to 12.7 from 12.2.

Risk aversion “has risen significantly in recent weeks,” Banamex analyst Joel Virgen wrote in a research note on Sept. 26.

Standard Chartered said it reduced its 2011 year-end forecast to 13.8 per dollar from 11.4 in a Sept. 26 report.

The peso may rebound to 12.5 per U.S. dollar if European policy makers can solve the region’s debt crisis, said Omar Martin del Campo, the Mexico City-based head trader at Banco Ve Por Mas SA.

U.S. Treasury Secretary Timothy F. Geithner predicted that European governments will step up efforts to resolve the region’s debt crisis after they heard the concerns of global finance officials last weekend’s meetings in Washington.

‘Solid Base’

The peso’s recent decline “is being completely influenced by Europe and the lack of news that can give the market certainty,” Martin del Campo said in a telephone interview. “However, Mexico has a solid base. It has a high level of international reserves. It has the capacity to take measures in case they’re required.”

Mexico’s international reserves rose 20.1 percent this year to $136.5 billion in the week ended Sept. 23, the central bank said on Sept. 27.

The extra yield investors demand to own Mexican government dollar bonds instead of U.S. Treasuries rose two basis points to 261 at 8:15 a.m. New York time, according to JPMorgan’s EMBI Global index.

The peso rose 0.5 percent to 13.4835 per U.S. dollar. The currency’s 8.4 percent drop this year is the third biggest among major Latin American currencies tracked by Bloomberg after Brazil’s real and Chile’s peso.

Manufacturing Slump

The cost to protect Mexican debt against non-payment for five years has risen 83 basis points this quarter through yesterday to 190, 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 March 2013 rose five basis points yesterday to 4.99 percent.

The slump in manufacturing and consumer confidence in the U.S. is hurting the peso, said Alejandro Padilla, a Mexico City- based debt strategist at Grupo Financiero Banorte-Ixe.

New York-region manufacturing shrank for a fourth straight month and in the Philadelphia area it contracted for a third time in four months, figures from the Federal Reserve showed. Confidence among U.S. consumers stagnated in September to an almost two-year low, according to data from the New York-based private research group The Conference Board released this week.

“There are some fundamental issues that have pressured the currency, mainly the slowdown of manufacturing activity,” Padilla said in a telephone interview. “Manufacturing is slowing down and there is also the problem of a confidence crisis in the U.S.”

--With assistance from Jonathan Levin in Mexico City. Editors: Lester Pimentel, Jonathan Roeder

To contact the reporters on this story: Benjamin Bain in New York at bbain2@bloomberg.net; Nacha Cattan in Mexico City at ncattan@bloomberg.net

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


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