Peru Bonds Fall as Leftist Takes Big Lead Ahead of Runoff

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Maria Elena Vizcaino
·2 min read
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(Bloomberg) -- Peru’s currency and bonds tumbled Monday after an opinion poll showed leftist presidential candidate Pedro Castillo as the clear favorite ahead of June’s presidential runoff. The Peruvian sol turned in the worst-performance in the developing world.

Castillo, whose party has praised Fidel Castro and Venezuela’s Hugo Chavez, is leading Keiko Fujimori by 11 percentage points, according to the survey by Ipsos Peru carried out between April 15 and 16. Fujimori is the polarizing right-wing daughter of a jailed former president.

The sol slid 1.14% to close Monday at 3.6730 per dollar, the biggest daily loss since November, while the nation’s dollar-denominated bond due in 2051 declined as much as 2.24%, the biggest drop since it was issued a month ago. Meantime, the cost of insuring the country’s debt against default over the next five years briefly jumped to the highest since June. The S&P/BVL Peru General Return Index, which measures Peruvian stocks, tumbled the most since November.

“Whoever wasn’t sure that this second round was going to be difficult, now it’s made clear,” said Mario Castro, a strategist at BBVA in New York. “It’s negative on the margin as there’s a long way to go. Some people will buy the dips.”

The nation’s bonds had already taken a hit this year, posting losses of 8.5% before today. That’s the worst performance after Belize, Argentina and Lebanon, which all trade at distressed levels, according to a Bloomberg Barclays index.

Since winning the first-round vote, Castillo’s party has said that if elected, he wouldn’t seize mining assets, preferring instead to renegotiate mining contracts. On Sunday, he said he won’t change the constitution until the nation asks him to through a referendum. The moves are the first signs of moderation during his campaign.

Citigroup Inc. cut its recommendation on Peruvian local currency debt Monday to neutral from a “small overweight” as the risk profile has worsened with a “very possible outcome where Castillo becomes the next president,” strategists Alvaro Mollica and Dirk Willer wrote.

READ: Peru Candidate Seeks Bigger Cut From Mining, Not State Control

Still, the poll “is a market negative signal,” Alberto Ramos, chief Latin America economist at Goldman Sachs, wrote in a note Monday. It “defies the conventional wisdom and view of pundits and political analysts that Castillo’s radical and extreme policy/political platform would not appeal to most voters.

(Updates with assets’ performance in third paragraph, Citigroup comments in seventh paragraph and new chart)

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