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 Business News | September 2006 
Mexican Pension Funds Buy Bonds on Calderon Victory
 Valerie Rota & Adriana Arai - Bloomberg
| | Citigroup's Afore Banamex, with $11 billion under management, returned 11.2 percent for the 12 months ended July. |
Mexico's biggest pension funds are increasing their holdings of government bonds, anticipating that President-elect Felipe Calderon will deliver on his promise to keep inflation under control.
Citigroup Inc.'s Banamex unit, which runs the nation's largest pension fund, increased fixed-rate peso-denominated bonds to 27 percent of its holdings in July from 24 percent a year before. Banco Bilbao Vizcaya Argentaria SA's Bancomer unit, manager of the second-largest fund, has 28 percent of its assets in the government debt. A year ago, it had less than 1 percent.
Investors expect that Calderon, whose victory was certified on Sept. 5 after a two-month battle with second-place finisher Andres Manuel Lopez Obrador, will pick up where President Vicente Fox left off. Fox cut inflation and the budget deficit, helping Mexico win an investment grade credit rating in 2002.
"Things are looking better for the economy," Francisco Gonzalez Almaraz, who oversees $10 billion of Mexican pension assets at Bancomer, said in an interview from Mexico City. "We are seeing that the new administration is already working on building consensus."
Biggest Rally
Mexico's currency today rose 0.1 percent to 10.9195 per dollar at 2 p.m. New York time. The peso has risen 3.8 percent since June 30, the second-best performance against the dollar of the 16 most-traded currencies.
Ten-year peso-denominated bonds are having their biggest rally in a year. The securities returned 7.1 percent since June 30, including reinvested interest, on pace for the best quarterly performance since September 2005. Bonds rebounded from a 0.9 percent loss in the second quarter, when polls suggested a Calderon loss.
Mexico's government may benefit from the gains tomorrow when it sells 3 billion pesos ($273 million) of five-year debt. Based on market prices, the securities will likely be sold to yield about 7.75 percent, the lowest since April 2004. The 0.12 percentage point decline in yield since last month's auction will save the government about $330,000 in annual interest costs.
Calderon, 44, will take over on Dec. 1 as the economy expands at its fastest pace in six years with an inflation rate near the lowest on record. The economy probably will grow 4.2 percent in 2006 while growth in consumer prices remains at about 3 percent, Finance Minister Francisco Gil Diaz said on Aug. 30.
Lower Yields
The improving economy has bolstered confidence and driven down yields. Mexico's 10-year fixed-rate peso bonds yield 3.34 percentage points more than similar-maturity U.S. Treasuries, down 1.25 percentage point from this year's high on June 20. In Brazil, the premium for eight-year bonds over Treasuries is about 9.30 percentage points.
The yield on the 8 percent bond due in December 2015 today rose 3 basis points, or 0.03 percentage point, to 8.19 percent. Last week, the yield on the benchmark bond dropped 8 basis points, the biggest decline since the week ending Aug. 11.
The price, which moves inversely to the yield, today fell 0.19 centavo to 98.75 centavos, according to Santander Central Hispano SA.
Government-regulated pension funds increased their holdings of fixed-rate government bonds by 38 percent since the election to 133.4 billion pesos as of Sept. 6, according to the central bank.
Pension Fund Demand
Bancomer's pension fund returned 8.7 percent in the 12 months through July 31 as it bought more bonds.
"The increase in exposure to longer-term bonds comes from expectations the economic outlook is looking better," Gonzalez said.
Citigroup's Afore Banamex, with $11 billion under management, returned 11.2 percent for the 12 months ended July.
"Banamex is betting that low interest rates, low inflation and macroeconomic stability in Mexico are here to stay," said Raul Feliz, a researcher from the Center of Economic Research and Teaching, a Mexico City-based research institute.
The risk of holding Mexican bonds is declining after rising in June. Investors shunned the debt as Lopez Obrador promised to boost spending and scrap some policies that promoted foreign investment.
Credit-Default Swaps
The price of credit-default swaps based on Mexican debt fell to a record low $47,083 on Sept. 5, the day the electoral court settled Lopez Obrador's challenges, according to data compiled by Bloomberg. Credit-default swaps are financial instruments based on corporate bonds and loans that are used to speculate on an increase or decrease in indebtedness.
The price of credit-default swaps based on Mexico's bonds reached a high this year of $88,565 on June 27. Investors who buy the contracts are paid $10 million in exchange for the securities should Mexico default in the next five years.
Lopez Obrador, a 52-year-old former mayor of Mexico City, is keeping up his fight and on Sept. 16 vowed to form his own government as thousands of supporters hailed him as the "legitimate" president at a rally in Mexico City. He wants to force Calderon to adopt some of his economic agenda to ease political tensions.
`Instability'
"Calderon appeals to those who have robbed the country of great amounts of capital, who take advantage of the country's economic instability," Gerardo Fernandez Norona, national spokesman for Lopez Obrador's party, said in an interview in Mexico City. "Lopez Obrador promised to fight corruption and the privileged class."
After the court ruling, Calderon said he may delay seeking changes to the constitution to allow private investment in the energy industry, one of his top campaign promises. Instead, he would give priority to fighting poverty and boosting employment.
Calderon, a former energy minister under Fox who served twice in the nation's legislature, probably will do a better job building alliances in a fractured Congress, said Gonzalez at Bancomer. That may enable him to fulfill promises to lower retirement expenses and simplify the tax code.
"It's more likely that reforms will be passed in this six- year term than in Fox's administration," Gonzalez said.
To contact the reporters on this story: Valerie Rota in Mexico City at vrota1@bloomberg.net ; Adriana Arai in Mexico City at aarai1@bloomberg.net. |
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