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Bill Gross: This is up to 20% undervalued
Closely watched bond investor Bill Gross said Mexico is a great bet after the peso (Exchange: MXN=) appreciated on news the Federal Reserve would leave its benchmark interest rate unchanged near zero.
The Janus Capital bond fund manager observed that the peso jumped half a percent Wednesday immediately after the U.S. central bank released its statement. He said he is bullish on Mexico because its forward bond rates on five- to 10-year debt are close to 7.5 percent and its inflation rate is 3 percent.
"Now its currency rate is appreciating as opposed to depreciating. I think the peso is 15 to 20 percent undervalued," Gross told CNBC's "Power Lunch." "An appreciating peso today, in the last 15 minutes, is a significant influence in terms of their markets, their bond markets and in terms of their credit."
He further noted that the Mexican credit spread is roughly 150 basis points higher than the U.S. spread.
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As for a Fed rate hike, Gross said he believes the central bank would eventually stop raising its fed funds rate at 2 percent, putting the 10-year Treasury yield at about 2.75 percent a few years from now.
That does not mean an investor will lose money by buying Treasurys now because the forward rate is the same as the current 10-year rate, he explained.
"To me it means no bear market, but it doesn't mean that you're going to make a lot of money in Treasurys either," he said.
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