Bloomberg News

Cheapest Currency Hedge in Year Signals Buy Peruvian Bonds, Citigroup Says

March 12, 2012

Citigroup Inc. (C) recommended investors buy local Peruvian bonds and take advantage of the cheapest foreign-exchange hedging costs in a year.

Citigroup advises its clients to buy sol-denominated bonds due in September 2013, which yield 3.44 percent, and hedge through cross-currency swaps at a cost of 1.5 percent, New York- based strategists Dirk Willer and Ram Bala Chandran wrote in a note to clients.

Peru’s sol is trading at the strongest level in 15 years after companies stepped up their currency purchases to pay local taxes, prompting the central bank to buy dollars to stem the rally. The central bank purchases dry up the supply of the U.S. currency in the domestic market, making it cheaper to sell soles versus the dollar in the non-deliverable forwards market.

“By soaking up the dollars you create a shortage of dollars onshore and forward points collapse,” Willer said by telephone.

One-month implied yield on the sol forwards, a measure of the costs to hedge the sol, dropped to a one-year-low of 0.71 percent on March 1, from 3.56 percent at the end of 2011, according to data compiled by Bloomberg. The implied yield, derived from the difference between the spot and forward prices, was 0.97 percent today, compared with the central bank’s benchmark interest rate of 4.25 percent.

The trade allows investors to pick up higher yields than the three-month London interbank rate, which is at 0.5 percent, without taking the currency risk, according to the strategists.

Peru’s central bank has bought $4.6 billion in the spot market this year, surpassing the $3.5 billion it purchased in all of 2011. It bought $9 billion in 2010.

The sol was unchanged at 2.6695 per U.S. dollar at today’s close, according to Deutsche Bank AG’s local unit. The currency earlier touched 2.6670, the strongest since 1997, data from Peru’s financial regulator show.

To contact the reporters on this story: Ye Xie in New York at John Quigley in Lima at

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

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