Latam Strategy
02 August 2018
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Non-residents exposure to Soberanos stands at ~USD 2mn DV01: The recently-issued August
2032 remains the bond to which non-residents have the highest exposure (Chart 3) of USD 2.3mn
DV01 from USD 2.4mn DV01 in March.
In line with the decrease in non-residents’ exposure, Peru’s pension fund system has also
decreased its exposure to the curve by 10% since its peak in March, a decrease of USD 0.9mn
DV01 (Charts 1 and 2).
After non-residents, pension funds maintain the second-largest exposure to the nominal bond
market totalling USD 7.9mn DV01. Pension funds’ biggest exposure is to the August 2037 bond, at
USD 2mn DV01 (Chart 3). Local banks are more exposed to shorter tenors of the curve with their
biggest exposure being the September 23 bond.
Foreign investors’ share of Peru’s local debt
The latest central bank data on public debt holdings shows that overseas investors’ share of
public debt has fallen further this year to USD 13.9bn in May (Chart 5). As a result, their share
in domestic public debt has fallen by 3.2pp since January. Nevertheless, the level of foreign
participation in Peru’s bond market remains relatively high for Latin America.
Pension funds’ (PF) share of public debt had been increasing since September 2017. However,
their share of total domestic public debt decreased marginally in the last two prints, while non-
residents’ share have increased, both in relative and absolute value (Chart 5).
Non-residents’ holdings of public debt represents only 23% of international reserves, which
leaves Peru in a strong position in the event of large financial outflows.
Charts 5-8: Non-residents’ share of Peruvian debt
20%
40%
60%15
30
45
60
Jan-11Jan-12Jan-13Jan-14Jan-15Jan-16Jan-17Jan-18
PEN
(b
n)
Non-residents holdings of public sector bonds
Non-residents holdings as a % of total debt (RHS)
Pension funds holdings as a % of total debt (RHS)
(3.5)
(1.5)
0.5
2.5
4.5
6.5
8.5
Jan-12Jan-13Jan-14Jan-15Jan-16Jan-17Jan-18
PEN
(b
n)
Non Residents Change (PEN)
Euro-clearablebond issuance
Banking institutions
8.6%
Pension funds
30.7%
Non-financial
public sector
3.0%
Others5.0%Non
residents
44.1%
Financial public
sector8.6%
Public sector bonds holdings
38%
43%
48%
53%
58%
3.5%
4.5%
5.5%
6.5%
7.5%
Jan-12Jan-13Jan-14Jan-15Jan-16Jan-17Jan-18
Peru Bono Soberano 10Y yield (reversed)Non-residents holdings as a % of total debt (rhs)
Sources: Bloomberg LLP, BNP Paribas, BCRP (Banco Central de Reserva del Peru)
Peru’s private pension funds (AFPs)
We examined the portfolio of Peru’s private pension funds and their performance to analyse the
allocation and distribution of assets under management (AUM) over the last few years. Peru’s
private pension fund system currently holds USD 48bn (Chart 10) of assets. In July, AFPs total
assets under management increased by 0.65% m/m in PEN terms.
The two highest allocations are in government securities and foreign mutual funds, which
together represent around 65% of the total portfolio (Chart 11). Although AFPs’ total AUM
increased by 6.2% y/y (up USD 2.8bn), the holdings of foreign investments saw the biggest
increase (up 13.4% y/y), followed by those of government securities (up 8.9% y/y).
Latam Strategy
02 August 2018
globalmarkets.bnpparibas3
Charts 9-12: Pension funds’ assets under management and breakdown
7.1%
3.0%
3.5%
4.0%
4.5%
-10%
-5%
0%
5%
10%
15%
Jan 12Mar 13May 14Jul 15Sep 16Nov 17
Peru pension funds nominal performance y/y
Overnight rate (RHS)
42.8
48.0
30
35
40
45
50
Jan 12Mar 13May 14Jul 15Sep 16Nov 17
Total assets under management (USD bn)
Govt. securities,
23.03%
Other local assets,
5.95%
Cash, 4.73%
Corporate bonds,
11.72%
Local equity,
10.60%
Foreign funds,
41.64%
Other foreign
assets, 2.92%
41.2%
23.2%
4%
16%
28%
40%
Jan 10May 12Sep 14Jan 17
Foreign mutual share of portfolio (%)
Government securities shareof portfolio
Sources: Bloomberg LLP, BNP Paribas, BCRP (Banco Central de Reserva del Peru)
Strategy and implications
We are currently receiving rates on Soberanos 2026s, based on our Soberanos factor model.
The position has moved ~15bp in our favour and we believe there is still room to reach our 5.00%
target (Peru: upside margin for Soberanos; going long 2026s). Charts 3-4 show that pension funds
have been increasing their share of the 2026s tenor and is now the biggest stakeholder. We
believe that compared to other tenors in the long end of the curve, the bigger share from locals is
supportive of our position in case of an outflow.
In line with our Soberanos position, we currently hold a bullish position on the PEN currency
triggered by our BEER model (Latam FX Strategy: BEER model triggers long PEN). We forecast
PEN at 3.20 by the end of this year, while our FEER model points to a fair value of 3.07 in the
long term, also supportive of our position (LATAM FX Quarterly: FEER model update).
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