In September, Pension Funds were the largest sellers (PEN0.8bn), while International investors were the largest buyers (PEN3.3bn). International investor holdings improved to the highest since January 2023 in terms of percent of outstanding bonds, while 3M aggregate flows are nearing historical highs at +3SD, suggesting a likely near-term slowdown of inflows or possible outflows. Pension Fund holdings of local debt continue to reach historically low levels at 7.8% of the total market. However, we expect this to improve over time as AFP AUM recovers post the approval of the recent pension reform that blocks future withdrawals.
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Market View: Peru local rates rallied through September. However, in October core real yields jumped higher amid stronger labour and economic data out of the US, which tempered market pricing of Fed cuts. This has driven a wave of dollar strength and has made the BCRP more cautious about additional rate cuts. We took profit on our PeruGB 2037s trade idea at our trailing stop of 6.70% on 4 October. International flows appear to be reverting as 3M aggregate flows approach historical highs at just under +3 standard deviations. We remain on the sidelines in rates, as investors remain cautious on EM local rates heading into the US elections. We note, however, that the risk premia that is building up should present good value opportunities in the curve as more clarity emerges on the external front. For Peru, domestic inflation should remain contained, with core continuing to revert towards the centre of the target range after near-term seasonal transitory inflationary pressures abate. Meanwhile, we note recent indications of strong growth are mainly attributable to an economic recovery from the 2023 slowdown, and do not indicate overheating as the output gap remains negative. This explains the absence of major growth-driven domestic inflationary pressures for now.
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International investors were the largest buyers in September, acquiring PEN3.3bn of Soberanos, raising total holdings from PEN61.2bn to PEN64.4bn. International investor holdings as a percentage of total bonds outstanding grew from 38.9% to 40.4%. Much of these flows were allocated to PeruGB 2031s to 2033s. This is the highest international investor holding in Soberanos since January 2023, signalling a continuation in the recovery of international investor holdings from the March lows of 35.5%, which was the lowest level since July 2016. Nevertheless, we note that cumulative foreigner inflows over the past three months have amounted to just over PEN10bn (Historical Percentile - since 2012: 98.5)
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Pension funds were the largest sellers of Soberanos, selling PEN0.8bn, taking holdings from PEN13.3bn to PEN12.4bn. Local pension funds now own just 7.8% of the Soberanos market, down from 8.4% in August and the lowest historical level of local AFP holdings.
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Local bank holdings fell marginally by PEN0.4bn, with allocation edging down from PEN60.1bn to PEN59.7bn, while holdings fell by 0.8pp from 38.2% to 37.4% of total bonds outstanding as net Soberano issuance amounted to PEN2.3bn.