Peruvian Sol Bonds Post Longest Winning Streak Since 2006 on Inflation

Peruvian bonds posted their longest winning streak since 2006 as traders bet a slowdown in the global economy will spread to the Andean nation and help contain inflation.

The yield on Peru’s benchmark 7.84 percent sol-denominated bond due August 2020 declined four basis points, or 0.04 percentage point, to 5.90 percent at 2:57 p.m. in New York, according to prices compiled by Bloomberg. The bond’s price rose 0.25 centimo to 113.32 centimos per sol.

Bond yields have fallen for nine straight days, the longest streak since the period ending Dec. 18, 2006, when yields also fell for nine days. Yields shed 12 basis points this week.

Investors are betting Peruvian inflation will ease as slower growth in Europe and the U.S. dim growth prospects for the South American country and cause international food and fuel prices to fall, said Siobhan Morden, head of Latin American strategy at RBS Securities Inc. in Stamford, Connecticut.

“Inflation expectations have collapsed,” Morden said. “It’s not a liquidity crisis like we had in 2008, but more the traditional global slowdown. Emerging markets aren’t heading into crisis, but there are certainly slower growth prospects.”

The deceleration in the world economy and domestic activity in Peru led the country’s central bank Aug. 11 to keep interest rates unchanged for a third month.

Inflation will ease after hitting a three-year high in July, the central bank’s research director Adrian Armas said Aug. 12.

Economic Outlook

Peru’s export revenue is likely to fall next year as global demand for its metals declines, Finance Minister Miguel Castilla said Aug. 8. The $153 billion economy will expand 6 percent to 6.5 percent this year, after growing 7.7 percent in the first half, he said.

“If metal prices were to plummet, Peru’s economy could contract in 2012, due to its heavy reliance on mining investments,” Nomura Securities Inc. said today in an e-mailed report. “Under this scenario, we would expect the central bank to cut rates aggressively and for the government to increase spending in order to jump-start the economy.”

Peru is the world’s biggest silver producer, third largest in copper and zinc, and sixth in gold.

The sol strengthened 0.3 percent to 2.7340 per U.S. dollar, from 2.7414 yesterday. That’s the currency’s strongest level since April 2008.

The extra yield investors demand to own Peruvian government bonds instead of U.S. Treasuries fell six basis points to 210, according to JPMorgan Chase & Co.

John Quigley - Bloomberg

To contact the reporter on this story: John Quigley in Lima at jquigley8@bloomberg.net

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