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 Business News | May 2005 
Peso Bond In Demand Overseas
 Wire services
| | Mexico is finding more buyers for peso bonds in New York, Toronto and Luxembourg than in Mexico City. |
OppenheimerFunds Inc., AGF Funds Inc. and KBC Conseil-Service are among international investors that own three quarters of the nation's US6 billion of 10 and 20-year fixed-rate peso bonds. Foreign investors own 2 percent of the government debt that matures in a year or less.
International buyers are attracted to yields of more than 10 percent and prospects the peso will gain as the economy becomes more intertwined with the United States. The lack of interest among domestic investors reflects concern about the country's history of high inflation, devaluation and default.
"For a foreigner, locking in a yield of 10 percent is psychologically a good deal," said Marcos Ramírez, 42, head of treasury and investment banking at Santander Central Hispano SA's Mexican unit, the nation's biggest peso bond dealer. "For us locals, who have seen rates of 40, 30 and 20 percent, there's that Latin fear that something could go wrong."
Mexico on Tuesday sold 16.7 billion pesos (US1.5 billion) of bonds maturing in as long as 10 years. As recently as five years ago, the country didn't sell fixedrate bonds with maturities of longer than 30 days. The country's 9 percent peso bond due in 2012 rose for a second day on Wednesday, adding 0.7 centavo to 92.71 centavos, paring the yield to 10.4 percent on Wednesday.
Karel de Cuyper, who oversees 400 million euros (US520 million) of bonds at Luxembourg-based KBC Conseil-Service, said high yields relative to countries such as Hungary prompted him last year to buy peso bonds with maturities of as long as 18 years for the first time.
Local debt sold by Mexico and Hungary carries an A credit rating from Standard & Poor's (S&P). Hungary pays about 7 percent, or 3.5 percentage points less than Mexico, to borrow in its domestic currency over 10 years.
Mexico is "a very appealing yield in the single A area," said Cuyper, who manages bonds from about 30 countries, including Mexico. "Economically, Mexico is a good story."
The increased confidence among international investors shows how far Mexico has come since the 1994 peso devaluation led the United States to organize US50 billion of credit lines for the country, helping avert a default and collapse of the banking system.
Santander's Ramírez, then in charge of the trading desk of Banco de Desarollo Nacional Financiera, the nation's development bank, said he left his wife and two-month-old baby at home to spend the night at the office after President Ernesto Zedillo's devaluation Dec. 20, 1994 caused bonds and stocks to tumble. By March 1995, the yield on the 28day government bill climbed to as high as 83 percent.
"It was such a big blow," said Ramírez. "I remember looking at our baby and asking myself: What kind of country will this generation inherit?"
Mexico, which devalued its currency three times and defaulted on debt once since 1982, won its first investment-grade rating in March 2000, helped by increased exports and foreign investment after the North America Free Trade Agreement took effect in 1994.
The country's credit rating was raised again by Moody's Investors Service and S&P this year after President Vicente Fox halved the annual inflation rate to 4.4 percent and reduced the budget deficit in each of his first four years in office. The economy grew 4.4 percent last year, its fastest pace in four years.
Central Bank Governor Guillermo Ortiz has set a 3 percent inflation target, part of an effort to bring Mexico in line with its main trading partners. Consumer prices rose 3.1 percent in the 12 months through March in the United States, while the rate for Canada was 2.3 percent.
"If you think they'll achieve their inflation targets in the years to come, it's a great time to lock in a relatively high nominal yield," said Sam Finkelstein, who helps manage US2.4 billion in emerging market debt at Goldman Sachs Group Inc. in New York. A decline in the inflation rate would boost fixed-rate bond prices.
Cuyper said the nation's yield advantage and a stable peso led him to hold on to fixed-rate bonds over the past month as he cut holdings of Hungarian and Polish debt. The peso has risen 1.7 percent against the dollar this year. The currency gained for a fourth day today, adding 0.4 percent at 10.9595 per U.S. dollar on Wednesday.
Investors such as Goldman Sachs's Finkelstein said they sometimes use futures and forward contracts to hedge their peso bond holdings against a decline in the currency. Others including Cuyper said they rarely hedge and only buy local-currency debt of developing nations when they think the currency will appreciate.
Mexico has outperformed benchmark emerging-market debt indexes as developing nation bonds declined this year.
JPMorgan Chase & Co.'s Emerging Local Markets Plus, a total return index that gauges the performance of debt issued by developing countries from Russia to Brazil, has fallen 2.4 percent since hitting a high on March 11. According to JPMorgan, the nation's debt gained 1.8 percent in the same period; Hungarian bonds fell 6.4 percent and Polish securities tumbled 11 percent. The indexes measure total return.
Pension funds, the nation's biggest investors with US44.4 billion of assets, aren't as optimistic as their foreign counterparts. Enrique Garduno, who manages US9 billion in Mexican pension assets for Banco Bilbao Vizcaya Argentaria SA, owner of the nation's biggest bank, said he's shunning fixed-rate peso debt on concern prices will decline as the central bank boosts interest rates to keep inflation in check.
The central bank raised interest rates 12 times in the past 14 months to fight inflation, sending the overnight lending rate to 9.6 percent from 5.5 percent since Feb. 19, 2004. Ortiz said on April 14 he expects inflation will slow to less than 4 percent by yearend.
"Rising interest rates can have an important impact on the longend of the curve and bring volatility to the portfolio," Garduno said in an interview in Mexico City. "We can't afford this kind of volatility. Foreigners work with a longer investment horizon."
Deputy Finance Secretary Alonso García said he's convinced domestic investors will change their views.
"I'm confident Mexican pension funds will be big holders of fixed-rate peso bonds," García said in an April 28 interview. |
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