Summary: International investors were the main buyers (PEN2.2bn) of Soberanos in January. Local banks were the main sellers (PEN0.6bn), while pension funds sold just PEN0.3bn. International investors’ holdings shifted towards longer-dated tenors (37s, 39s) and some tenors in the belly (31s, 33s), which was likely due to the higher carry and rolldown. The allocation by Pension funds saw some reductions in 37s, 39s, adding to the belly (31s, 33s, 34s), and 40s in the long-end. Overall, monthly flows suggest healthy participation by foreigners in net primary issuance in January.
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Market View: Peru bond yields twist-steepened in January by about 18bp in 2s10s, while US2s10s in net terms did not move much with the 10Y rallying by just 3bp. Peru yields remain fairly anchored, all things considered. The resilience of local bond yields continues to reflect Peru’s stronger fiscal position relative to its LatAm (and most EM) peers, as well as its currency stability and higher risk-adjusted real yields. Domestic inflation in Peru is anchored, with core likely continuing to revert towards the centre of the target range starting in February given the supportive base effects. Peru looks to be a stronger regional defensive play than its historically fiscal conservative counterpart, Chile, which is likely to face some inflationary and fiscal pressures in the coming years as it approaches its debt limit of 45% of GDP. By comparison, Peru is likely to remain closer to a debt-to-GDP ratio of 33%. Comparing Peru vs. US10Y yields outright leaves much to be desired, however, given the differing inflation scenarios: a look at 12m ahead ex-post real rates in 10Y helps to provide a better picture of the value that is offered from a relative real yields perspective. We remain long PeruGB 2039s, from 7.13%, with a target of 6.50% and a stop-loss of 7.40%. The higher carry and rolldown in the belly is likely to provide some relative value protection in a less favourable environment for duration risk. However, we continue to see more potential for duration gains in the long-end to materialise as fiscal performance is set to improve in 2025, inflation expectations and risks continue to fall, and pension funds are likely to have more scope to increase their holdings amid recovering AUM.
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Pension funds were net sellers of Soberanos in January, selling a net PEN0.3bn, taking holdings from PEN16.0bn to PEN15.7bn. Local pension funds now own just 9.5% of the Soberanos market, down from 10.3% in November 2024, but still up from a historical low of 7.8% in September 2024, after the maturity of the recent repurchase agreements with the BCRP and steadier inflows into the AFP system.
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International investors were the main buyers in January, acquiring PEN2.2bn of Soberanos, raising their total holdings to PEN69bn from PEN67bn in December 2024. International investor holdings as a percentage of total bonds outstanding continues to shift higher, with this figure now at roughly 42% continuing its recovery from the recent 35.5% low of March 2024. Net primary issuance saw a healthy participation from this cohort.
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Local banks were the largest sellers in January. Holdings fell slightly to PEN56.8bn from PEN57.4bn in December 2024, or to 34.3% from 34.9% of the total outstanding bonds. Overall, local bank holdings continue to trend lower from the 40.3% recent high in June-2024, as international investor and local insurance company holdings recover. This trend is likely to continue as AFP also starts to allocate more.