Azernews.Az

By Bloomberg

So much for the hand-wringing over falling oil prices.

Investors are piling back into Mexico, spurring a rebound in the country’s peso-denominated bonds after oil’s collapse triggered a selloff in December that was the worst in 20 months. In January, the notes have returned 4.6 percent in dollar terms, the most in almost two years and more than twice the average for emerging markets.

Bond buyers are looking past the slump in oil revenue, which pays for a third of Mexico’s budget, and focusing instead on the prospect for higher exports to the U.S. economy. Mexico has also become a safe bet for investors looking to boost their returns as lackluster growth in the developed world prompts central banks to cut interest rates, pushing yields toward zero.

“The global situation is tough,” said Roberto Sanchez- Dahl, a money manager at Manulife Asset Management, which oversees $3.5 billion in emerging-market debt. “So investors are looking around for the countries that are better positioned. In that respect, Mexico gets good grades.”

Yields on Mexico’s peso-denominated 10-year notes fell 0.6 percentage point this month to 5.2 percent.

At that level, they’re still about 3.5 percentage points higher than yields on 10-year Treasuries. Benchmark German bunds yield 0.36 percent, while Japan’s 10-year yields were about 0.3 percent.

The bonds were pummeled in the last six months of 2014 as the price of oil fell by half, leaving holders with a 2.1 percent loss for the year.

Potential Growth

It was a letdown for investors including BlackRock Inc. Chief Executive Officer Laurence D. Fink, who had pointed to Mexico’s growth potential after the passage of new laws opening the state oil industry to private companies. Instead, the collapse in crude has spurred cutbacks by oil drillers worldwide, curbing foreign direct investment into Mexico.

Now, the narrative is turning again. On Jan. 28, Societe Generale SA recommended buying the Mexican peso with a target of 14.05 per dollar. Right now it’s at about 14.8. Economists surveyed by Bloomberg forecast the peso will strengthen this year by the most among major currencies.

A rally would provide an additional source of returns for dollar-based investors in peso bonds.

The Mexican economy and the peso are showing strength in comparison with emerging market peers, thanks to the country’s exposure to the U.S. recovery and “gradually building momentum,” SocGen’s Eamon Aghdasi wrote in a report.

“Within the emerging-market context, people are looking for the good stories, and Mexico is still seen as one of the best stories,” Vivienne Taberer, who helps manage $14 billion in fixed-income assets at Investec Asset Management, said by telephone from Cape Town, South Africa.