Bloomberg News

Record Peso Bond Maturities Exceed U.S. Debt: Mexico Credit

June 06, 2011

June 6 (Bloomberg) -- Mexico is extending local bond maturities to a record as part of an effort to safeguard its economy should Europe’s debt crisis and the U.S. slowdown prompt investors to pull capital from the Latin American country.

Mexico pushed out the average length of its local debt to 7.3 years in 2011 from 6.3 in 2009, according to the Finance Ministry. It was as low as 1.5 years in 2000. The average maturity of U.S. debt reached five years in March, up from 4.1 years 24 months earlier, according to the U.S. Treasury’s Office of Debt Management.

Policy makers are seeking to bolster the economy’s ability to withstand a global slump after the financial crisis sparked by the U.S. housing crash plunged it into recession in 2009, Deputy Finance Minister Gerardo Rodriguez said June 2. Latin America’s second-biggest economy after Brazil shrank 6.1 percent in 2009, the most since 1995, prompting Standard & Poor’s and Fitch Ratings to cut the country’s credit grade.

“Many countries before the crisis were moving to lower their average maturity as a way to reduce financing costs,” Rodriguez said in a June 2 interview at Bloomberg’s headquarters in New York. “A country like Mexico needs to build extra cushion before starting to fine tune.”

Yields on Mexico benchmark peso bonds due in 2024 sank 83 basis points, or 0.83 percentage point, in the past three months to 7.13 percent, according to data compiled by Bloomberg. In Brazil, yields on real-denominated notes due in 2021 rose two basis points over the same period to 12.76 percent.

‘Buy Your Debt’

Mexico’s economy, which sends 80 percent of its exports to the U.S., grew 4.6 percent in the fourth quarter from a year earlier. In the U.S., economic expansion slipped to a 1.8 percent annual pace in the first quarter.

A longer average maturity for government notes improves the reference point for companies to sell bonds, boosts liquidity and spreads out debt payments, said Gabriel Casillas, chief Mexico economist at JPMorgan Chase & Co. in Mexico City.

“Once you have accomplished these three things, you have much more liquid bonds and you boost the possibility that global portfolio managers will buy your debt,” Casillas said in a telephone interview. “They waited for the financial crisis to end, when no one wanted risk, before doing this.”

Foreign Demand

International investors bought $21 billion of Mexican debt denominated in pesos in the six months through March, the most since the central bank began compiling the data in the 1960s, as inflation holds near the lowest level in five years and the currency rallies.

Annual inflation slowed to 3.3 percent in mid-May from 4.4 percent in 2010 and touched a five-year low of 3.04 percent in March. Mexico is the only major Latin American country that hasn’t raised rates in the past year. Policy makers held the benchmark rate at a record low 4.5 percent last month.

The peso is up 5 percent this year. Mexico’s bid to extend maturities means that it’s selling more expensive debt, said Sergio Martin, chief economist at HSBC Mexico SA in Mexico City.

“Everything has a trade off,” Martin said in a telephone interview. “The trade-off is that you are going to have to pay more to extend maturities.”

Yields on peso bonds due 2029 climbed seven basis points today to 7.61 percent, while government securities due in three years yield 5.65 percent, Bloomberg data show.

Market Moves

The extra yield investors demand to own Mexican dollar bonds instead of U.S. Treasuries fell two basis points to 142 at 5:21 p.m. New York time, according to JPMorgan.

The peso weakened 0.7 percent to 11.7469 per U.S. dollar.

The cost to protect Mexican debt against non-payment for five years rose two basis points to 105, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.

Yields on TIIE interest-rate futures contracts maturing in December rose three basis points to 5.01 percent, indicating traders expect the central bank will boost its benchmark rate by December. As recently as April 4, they predicted an increase by July, according to data compiled by Bloomberg.

Foreign Reserves

Mexico is boosting foreign reserves and limiting how much money banks can lend to their parent companies abroad or at home as part of the effort to protect the economy from the European debt crisis and slowing U.S. growth, Rodriguez said.

Moody’s Investors Service downgraded Greece to Caa1, on a par with Cuba, and on June 1 raised the nation’s risk of default to 50 percent. A report last week showing the jobless rate in the U.S. unexpectedly rose added to evidence the expansion in the world’s biggest economy is flagging.

Mexico has boosted reserves to a record $127.9 billion in the week ending May 27, Mexico’s central bank said last week in an e-mailed statement. They fell to below $73 billion in August 2009 from over $86 billion in July 2008.

“The type of thinking that we’ve been doing is how it could affect us, and what would be the transmission channels so that we can anticipate and be ready to react if something material happens on the negative side,” Rodriguez said.

The government plans to continue increasing the maturity of local debt, Rodriguez said. He expects bond maturities to be “at least” 7.9 years by the end of 2011, and foresees them lengthening through 2012.

Foreigners pulled $4.4 billion from Mexico’s local debt market in the last three months of 2008, the most since the first quarter of 1995, when a devaluation of the peso sparked capital outflows across the region in what became known as the Tequila Crisis. The outflows helped spark a 20 percent plunge in the peso against the dollar in 2008.

“The Finance Ministry has been very prudently preparing for an eventual withdrawal of flows,” Sergio Luna, chief economist for Citigroup’s Banamex unit in Mexico City, said in a telephone interview. “In an open financial system, extending maturities is a way to help manage capital flows.”

--With assistance from Jose Enrique Arrioja in Mexico City. Editors: Lester Pimentel, Brendan Walsh

To contact the reporters on this story: Boris Korby in New York at bkorby1@bloomberg.net; Andres R. Martinez in Mexico City at amartinez28@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net


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