(Bloomberg) -- Bill Gross is no longer running the world’s biggest bond fund, but one thing hasn’t changed: his love for Mexico.
In a Twitter post on Thursday, Gross said the country offered the “most attractive yields in the world,” a week after proclaiming on a CNBC interview that Mexico’s government debt was his “best” recent trade idea.
The 71-year-old Gross, who departed Pimco in September, emerged as a Mexico bull three years ago when he praised its bonds and currency as the nation prepared sweeping changes to its energy policies. Now at Janus he’s betting that slowing inflation will lead the central bank to keep interest rates lower than traders are anticipating.
“He’s postulating that Mexico will successfully see off inflationary pressures and the actual path of the policy rate will come in lower than what you’re seeing in the forward curve,” said Michael Roche, a fixed-income strategist at Seaport Global Holdings. “He’s sharing that observation with everyone and I must say it does seem pretty reasonable.”
Mexico was one of the top 10 holdings in Gross’s $1.5 billion Janus Global Unconstrained Bond Fund as of May 31, according to fund data on Janus’s website. It used derivatives contracts to establish the bullish position.
Gross didn’t respond to requests for comment made by telephone and e-mail to the investment company’s press office.
Forward contracts indicate Mexico’s central bank will raise benchmark borrowing costs to more than 7% by 2020 from a record-low 3%. Gross entered into swaps contracts that will be profitable if the market prices in Mexican rates below 7.8% over the 2020-2025 period, according to an e-mail from Janus.
With the country’s annual inflation rate at a more-than- four-decade low of 2.88% and the economy plagued by sluggish growth, it isn’t hard to see why Gross is skeptical rates will rise that high.
The central bank said just last week that the inflation rate will probably end the year at less than its 3 percent target. That would be the lowest since 1968, when information on price changes was limited to Mexico City.
And while central bank officials have suggested they’re likely to raise rates when the U.S. makes a move, the Federal Reserve has signaled its increases are likely to be gradual.
Gross is “saying he likes debt in the middle of the range, with maturities of five to 10 years,” Benito Berber, an analyst at Nomura Holdings Inc., said from New York. “The curve is pricing in rate increases but our view is that it might be pricing in more hikes than will actually happen.”
Gross started talking up Mexico in June 2012, when he said he favored the nation’s bonds over German debt, citing the Latin American nation’s higher yields and lower debt levels.
While Mexico’s peso-denominated debt outperformed Germany in dollar terms over that span, its 7.1% return still lags behind the average for emerging markets, according to data compiled by Bloomberg.
In his June 10 interview on CNBC, Gross called attention to Mexico’s inflation-linked bonds.
He said traders were demanding too large of a premium to buy the debt relative to similar U.S. securities and that the Mexico bonds may also get a boost from a rebound in the peso, which had been “trashed” in recent months. Mexico’s currency weakened 0.6 percent Wednesday to 15.4937 per dollar as of 3:26 p.m. in New York, extending its decline this year to 4.8%.
Mexican linkers due in 2025 yield about 2.5 percentage points more than U.S. notes that protect against inflation, data compiled by Bloomberg show. At A3, Mexico is rated six levels below the U.S. by Moody’s Investors Service.
“The quality difference doesn’t justify it,” Gross said.