Latin Finance - January/February 2011 - 20

local currency investment

Asset managers in the developed world on whether such a turnaround would make bets on Mexico’s TIIE inter-bank extinguish the local currency spree, as has continue to accumulate cash seeking rate. International investors tend to buy happened in the past. an EM home. Flows into EM debt were the long end of the curve, Simonelli Most analysts see the US Fed and forecast to hit a record $70-$75 billion in says, supplementing locals, who prefer ECB with rates on hold through 2011, 2010, according to JPMorgan, up from the short end. while LatAm rates remain The largest outstanding much higher than the G3, Mbono is the 7.5% of 2012, at Local Currency Bonds from 2007 (% return) highlighted by Brazil’s fat 99 billion pesos as of October, GBI-EM local currency index beats everything but gold 10.75% benchmark as of early and the largest Udibono the December. Even if this picture 4.0% of 2040, with 46 billion changes, some investors say pesos. Of 1.5 trillion pesos in Gold local currency appetite will be outstanding Mbonos at the GBI-EM Global sustained. end of October, 445.0 billion “It’s structural,” says OTPP’s pesos was held by foreigners, EMBIG Simonelli. “There are a lot according to Scotia Capital. US High Grade of changes that go beyond Foreigners account for 16.4 CEMBI Broad the technical reasons, which billion pesos of the 540.0 billion are certainly making the pesos equivalent outstanding in UST trend faster and are not to be Udibonos. US High Yield discounted. But there is also a Chile’s lack of capital change in the dynamics of the controls make it nearly as easy EM Equities supply and demand,” he says. to invest in as Mexico, Simonelli S&P 500 OTPP has about 50% of says. It is smaller though, -40 -20 0 20 40 60 80 100 its EM debt in local-currency and about 75% of its onshore instruments such as onshore products are inflation-linked. Returns since 12/31/2007 Brazil and Mexican government Peru and Chile are similar to Source: JPMorgan bonds. Simonelli says the Mexico in that special accounts Canadian fund’s exposure are not necessary for onshore was zero in 2006. Depending on market $43 billion in 2009, the previous record. investment. Both have smaller offerings conditions, this percentage could easily These funds desperately need yield, in terms of size of issuance and the surpass 50% in the future, he says. with G3 rates near zero. They are also variety of products involved, Simonelli “The great proof that these changes working against weaknesses in the dollar says. Difficulty in accessing these markets are structural is 2008,” Simonelli says. makes OTC transactions a popular option. and other “hard” currencies. Most investors agree that a narrowing “That year was the strongest stress test Colombia has some necessary in interest rate differentials and a stronger you could imagine for any asset class. registrations, however, depending on Even though we did see some weakness, dollar versus EM currencies would spark the type of securities. It has also used it came back roaring. The only asset some reversal in flow. But opinions differ capital controls in the past, which can to outperform EM local make it prohibitive for currency since 2007 would some investors. Last year Main LatAm Domestic Bonds by Size be gold.” saw renewed speculation Brazil and Mexico Dominate that the government Global-Local Here to Bond Coupon (%) Country, Type Outstanding (bn) might intervene to stop Stay? appreciation of the NTN-F 2012 11.65 Brazil, fixed rate BRL92.6 For those not venturing currency. NTN-B 2045 5.62 Brazil, inflation-linked BRL51.9 onshore, the global-local The heads of both currency bond market is finance ministry and NTN-B 2013 5.83 Brazil, inflation-linked BRL49.9 ramping up. Colombia central bank said NTN-B 2015 5.92 Brazil, inflation-linked BRL49.4 issued $1.3 billion late last year that the Mbono 2014 9.50 Mexico, fixed rate MXP99.0 equivalent in 7.75% of 2021 government would seek Global TES through a sale to avoid implementing Mbono 2012 7.50 Mexico, fixed rate MXP96.0 in April. A July retap lopped restrictions on Mbono 2020 8.00 Mexico, fixed rate MXP82.0 100 basis points off of the foreign inflows. Peru, TES 2012 9.25 Colombia, fixed rate COP8,851.0 April yield. meanwhile, offers The sovereign saw the investors Euroclearable TES 2016 7.25 Colombia, fixed rate COP10,370.0 Global TES curve trade global depositary receipts TES 2024 13.70 Colombia, fixed rate COP13,650.0 80 basis points through and has no barriers to Source: Finance ministries the local curve in April, foreign investment.

20 LatinFinance

January/February 2011

Latin Finance - January/February 2011

Table of Contents for the Digital Edition of Latin Finance - January/February 2011