Bloomberg News

Peso Bonds Posting Longest Slump Since February: Mexico Credit

June 20, 2011

June 20 (Bloomberg) -- Mexican peso bonds are posting their worst losing streak in four months as slowing U.S. growth and a deepening debt crisis in Europe prompt investors to shun the Latin American country’s fixed-income assets.

The yield on Mexico’s benchmark notes due in 2024 has jumped 24 basis points over two straight weeks of losses, the longest stretch since Feb. 11, to 7.31 percent. In Colombia, yields on the country’s peso debt due in 2020 sank 24 basis points, or 0.24 percentage point, to 7.81 percent during the same period while those on Brazilian bonds due 2021 slid 10 basis points to 12.34 percent.

Growing concern that Greece may default and that the slowdown in the U.S. economy will crimp demand for Mexico’s exports are snapping a bond rally spurred by the slowest inflation in almost five years. Yields on the benchmark bonds touched a six-month low of 7.03 percent on June 1 as annual inflation slowed to 3.3 percent in May from 4.4 percent in 2010. Inflation in Brazil quickened to 6.55 percent in May.

“What’s happening is that people are getting more risk averse,” Benjamin Souza, who manages 53 billion pesos ($4.5 billion) at San Pedro Garza Garcia, Mexico-based Grupo Invercap SA’s pension fund, said in a telephone interview. “Any assets where you see a bit of risk are getting hit.”

Greece’s growing debt crisis and the slowdown in the global economy are driving investors to the safety of AAA-rated debt, sparking a four-month rally in U.S. Treasuries that has sent yields on the benchmark 10-year bond below 3 percent.

Month High

Yields on Mexico’s bonds due 2024 rose to a one-month high of 7.32 percent on June 16, according to data compiled by Bloomberg. The bonds have returned 6.4 percent this year in dollar terms, compared with an average gain of 4.9 percent for local-currency debt sold by Latin American countries, according to Bank of America Corp. indexes.

The U.S. economy buys 80 percent of Mexican exports.

Mexican peso bond yields may climb another 20 basis points in the next month as negotiations on a bailout for Greece and on an increase in the U.S. debt ceiling drag on, said Leonardo Armas, deputy director of research at Mexico City-based brokerage Invex Casa de Bolsa SA.

Greek Prime Minister George Papandreou is struggling to gain parliamentary approval for a 78 billion-euro ($111.6 billion) five-year package of budget cuts and asset sales by July to ensure the country receives a new aid package from the European Union. U.S. lawmakers are seeking to reach an agreement to increase the $14.3 trillion debt limit before Aug. 2, the date on which the Treasury Department said it will have exhausted all its borrowing authority.

Greek Situation

“The longer it takes to solve the Greek situation and the U.S. debt problem, the more volatility we are going to see,” Armas said in a telephone interview.

Mexican pension funds, the second-biggest holders of government-peso debt after foreign investors, had boosted their holdings of the securities in May to the highest level since January, the regulator said on June 15. The funds held 59.2 percent of the 1.46 trillion pesos they manage in Mexican government securities.

The bond declines over the past two weeks are creating a buying opportunity for investors, including pension funds, said Alejandro Urbina, who helps manage $800 million in emerging- market securities at Silva Capital Management LLC in Chicago.

“Given the inflation outlook and the performance of Treasuries, I don’t think the pension funds got in too late,” Urbina said in a telephone interview. “These yields are here to stay for a while. This is an opportunity and if it slides even more, it’s a good entry point.”

U.S. Treasuries

The yield on 10-year U.S. Treasuries has plunged 47 basis points to 2.95 in the past two months, the biggest two month decline since the period ending in August.

Enrique Solorzano, who manages ING Groep NV’s Mexico pension fund, declined to comment through an assistant. Javier Orvananos, the pension fund manager at Citigroup Inc’s Banamex unit, didn’t immediately return a call or e-mail for comment. Jorge Perez Samano, pension fund manager at BBVA Bancomer SA, didn’t immediately return calls for comment. Banamex is the largest fund, followed by Bancomer and ING.

Yields on futures contracts for the 28-day TIIE interbank rate due in December was unchanged at 4.99 percent today, indicating traders expect the central bank to raise the rate by then. Mexico is the only major Latin American nation to keep its benchmark lending rate unchanged in the past year. The central bank left the rate at a record low 4.5 percent last month. The peso gained 0.3 percent to 11.867 per U.S. dollar at 5 p.m. New York time, leaving it up 4 percent this year.

Extra Yield

The extra yield investors demand to hold Mexican government dollar bonds instead of U.S. Treasuries narrowed 4 basis points to 145, according to JPMorgan.

The cost to protect Mexican debt against non-payment for five years rose three basis points to 113, 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.

The International Monetary Fund cut its 2011 forecast for U.S. growth for the second time in two months on June 17, saying that further setbacks to the recovery pose a threat to the world economy. The world’s biggest economy will grow 2.5 percent this year, less than the 2.8 percent projected in April, the IMF said in the report. The U.S. economy expanded 2.9 percent last year, helping foster growth of 5.4 percent in Mexico, the most in 10 years.

“There’s a global deceleration that’s made us start talking about a double dip again,” Invercap’s Souza said.

--Editors: Lester Pimentel, Jonathan Roeder

To contact the reporters on this story: Andres R. Martinez in Mexico City at; Jonathan J. Levin in Mexico City at

To contact the editor responsible for this story: David Papadopoulos at

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