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PIMCO Total Return Fund
Bill Gross’s ability to drive up the value of Mexican bonds is showing no signs of fading.
Yields on Mexican debt due in 2024 fell to an all-time low 5.07 percent after Gross, Pacific Investment Management Co.’s co-chief investment officer, said yesterday the peso was a “great currency” while praising the nation’s low debt level and interest-rate stability in a Twitter post. In June, Gross triggered a surge in the notes after saying he favored Mexican debt over German bunds, which pushed down yields to a record the following month. The gains bolstered returns for Pimco, the biggest owner of peso bonds due in 2020, 2021, 2022 and 2024.
Foreigners led by Gross have boosted their Mexican debt holdings to profit from an economy that’s growing faster than Brazil and a 4.5 percent interest rate that dwarfs the near-zero borrowing costs in the U.S. The peso has rallied 9.5 percent since Gross, who founded the world’s biggest bond fund, first made the comments in June, propelling returns in the Latin American securities. Peso notes have returned 13.6 percent in dollars in the past year, more than double the 5.5 percent average gain for emerging-market debt.
“These are investors that once they select a country, they stick to it, so it has a great impact,” Benito Berber, a Latin America strategist at Nomura Holdings Inc., said in a telephone interview from New York. “They mean a lot in the sense of one of the largest bond funds having sort of a core position and of course, they’re a huge fund.”
Mark Porterfield, a spokesman for Newport Beach, California-based Pimco, didn’t reply to a phone and e-mailed messages seeking comment on the company’s impact on Mexican bond market.
Pimco holds about 11 percent of the total amount of outstanding bonds, known as Mbonos, maturing in 2021 and almost 22 percent of those maturing in 2024. Its Total Return Fund (PTTRX) returned 7.7 percent in the past year, beating 94 percent of its like funds, according to data compiled by Bloomberg.
The peso surged the most among major Latin American currencies yesterday, jumping as much as 0.8 percent in intraday trading, after Gross’s comments. The currency has appreciated 1.8 percent against the dollar this year, following a record 8.4 percent advance last year.
Latin America’s second-biggest economy grew 3.85 percent last year, compared with 1 percent in Brazil and 2.2 percent in the U.S., according to analyst estimates compiled by Bloomberg.
Banco de Mexico is the only Group of 20 central bank to leave interest rates unchanged and refrain from buying bonds to drive down borrowing costs since 2009. The International Monetary Fund forecast in December that Mexico’s gross government debt will equal 43 percent of gross domestic product next year, versus 110 percent for the U.S. and 77 percent in Germany.
Foreigners held 55.1 percent of Mexico’s $146 billion fixed-rate peso bonds on Jan. 24, the highest proportion since February 2000, according to data from the central bank. Overseas investors facing near-zero percent interest rates at home sank $808 million into Mexico’s bond market in January, the most for emerging-market countries tracked by EPFR Global.
Mexican policy makers have indicated “they’re more tolerant” of currency appreciation, Roberto Sanchez-Dahl, who helps manage $1.6 billion in emerging-market debt at Federated Investment Management Co. in Pittsburgh, said in a telephone interview. “That’s kind of a signal for foreign investors to say, ‘Well this is where I’m not going to have such a big pushback if the currency were to appreciate.’”
A “perfect storm” may be forming in the world economy as signs of a recovery prompt more investment in emerging markets and some advanced nations that may lead to asset bubbles, Banco de Mexico Governor Agustin Carstens said yesterday.
“Risk appetite among investors has returned and the search for yield is in full force,” Carstens said in a speech in Singapore. “Concerns of asset-price bubbles fed by credit booms are starting to appear.”
“My fear is that a perfect storm might be forming as a result of massive capital flows to some emerging market economies,” he said. “This could lead to bubbles, characterized by asset mispricing, and then face a reversal in flows as the major advanced economies start exiting their accommodative monetary policy stance.”
Enrique Alvarez, the head of Latin America fixed-income research at IdeaGlobal, says the speech reflects Carstens’s concern that investors such as Pimco may cause the country’s financial assets to become overvalued.
Carstens “understands that this big player is obviously making a case for further upside,” Alvarez said by telephone from New York, referring to Pimco. “He also understands that the secondary flows that that could generate could really compress yields, and could really bring a sort of overvaluation to that market.”
The extra yield investors demand to own Mexican dollar bonds instead of U.S. Treasuries was unchanged at 166 basis points at 2:28 p.m. in New York, according to JPMorgan Chase & Co.’s EMBI Global index.
The cost to protect Mexican debt against non-payment for five years with credit-default swaps was little changed at 1 percentage point. Credit-default swaps pay the buyer face value if the issuer fails to comply with debt agreements.
Yields on interbank rate futures due in December, known as TIIE, fell four basis points to 4.5 percent yesterday.
The difference between the number of wagers by hedge funds and other large speculators on a peso advance versus those on a drop -- so-called net longs -- was 148,871 last week, close to a record high of 151,665 last month, according to data compiled by the Washington-based Commodity Futures Trading Commission.
“The market knows that Pimco is one of the biggest holders of Mexican bonds and therefore pesos,” Ramon Cordova, a currency trader at Banco Base SA in San Pedro Garza Garcia, Mexico, said in a telephone interview.
To contact the reporters on this story: Ben Bain in Mexico City at firstname.lastname@example.org; Jonathan J. Levin in Mexico City at email@example.com
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