Bloomberg News

Peso Bonds Drop in Split From U.S. on Greek Woes: Mexico Credit

September 26, 2011

Sept. 26 (Bloomberg) -- Mexico’s bonds, the emerging-market securities most correlated with U.S. Treasuries, are no longer moving in lockstep with debt from its northern neighbor as Europe’s debt crisis curbs demand for all but the safest assets.

Yields on Mexico’s peso bonds due in 2021 rose 37 basis points last week to 6.73 percent, the most since they were issued in February, while those on similar-maturity Treasuries sank 21, according to data compiled by Bloomberg. The 120-day correlation coefficient between Mexican bonds and Treasuries dropped to a nine-month low of 0.29 from a high of 0.57. A reading of 1 indicates the two always move in the same direction. Mexican securities now track Turkish bonds more closely than Treasuries.

The link between Mexico and the U.S. is breaking down as mounting concern Greece may default prompts investors to shun higher-yielding emerging-market assets and take refuge in Treasuries. Mexico, which sends 80 percent of its exports to the U.S., has left its benchmark interest rate at a record low since July 2009 and is the only Latin American country to not have changed borrowing costs in the past year. The U.S. has kept its key rate at an all-time low since December 2008.

“In normal times, there’s this connection between Mexico and U.S. interest rates due to the coordination of their business cycles,” Alejandro Urbina, who oversees $800 million of assets at Silva Capital Management in Chicago, said in a telephone interview. “In times of extreme risk aversion, it just breaks down. People try to front-run each other in selling.”

Global Crisis

Mexico’s peso bonds due in 2021 had rallied in line with Treasuries for most of the year, touching a record low 5.83 percent on Aug. 18, as a flagging U.S. economy signaled slower growth and tame inflation in Latin America’s second-biggest economy. Yields have jumped 89 basis points, or 0.89 percentage point, in the past month to 6.73 percent as concern Europe’s debt troubles may trigger a global financial crisis lead investors to dump emerging-market bonds, stocks and currencies.

The world is on the eve of the next financial crisis, with sovereign debt at its epicenter, Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., the world’s biggest bond fund, said last week.

“At first the dominant force was growth, or lack of growth, and now it’s the perception that the global financial system could yet again be under serious stress,” Benito Berber, a strategist at Nomura Securities Inc. in New York, said in a telephone interview. The turnaround reflects “risk associated with what’s happening in Europe,” he said.

Growth Outlook

Mexico’s economy will probably grow 4 percent this year after expanding 5.4 percent in 2010, central bank Governor Agustin Carstens said in an interview with Mexico City-based Radio Formula on Sept. 8. The U.S., the world’s biggest economy, will grow 1.6 percent this year, according to the median estimate in a Bloomberg survey of 66 analysts.

The extra yield investors demand to own Mexican government dollar bonds instead of U.S. Treasuries narrowed six basis points to 267 at 8:16 a.m. New York time, according to JPMorgan’s EMBI Global index.

The peso rose 0.6 percent to 13.4828 per U.S. dollar today after dropping 3.8 percent last week and touching a two-year low on Sept. 22.

The cost to protect Mexican debt against non-payment for five years rose 49 basis points to 206 last week, 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.

‘Finally React’

Yields on futures contracts for the 28-day TIIE interbank rate due in September 2012 rose 26 basis points last week to 5 percent.

Alonso Madero, who helps manage about $5.5 billion at Corp. Actinver SAB, said the breakdown in the correlation between peso bonds and Treasuries is temporary. Peso debt is undervalued and yields will drop as concerns Greece may default ease, he said.

“We expect the European authorities to finally react,” Madero said in a telephone interview from Mexico City. “We would expect confidence to return to the markets little by little and see the same correlation return.”

European governments are exploring speeding the setup of a permanent rescue fund as the urgency to halt the sovereign debt crisis mounts, an internal working paper shows. Senior finance officials this week will examine the cost advantages of creating the fund, known as the European Stability Mechanism, in July 2012, a year ahead of schedule, according to a staff paper prepared for the meetings and obtained by Bloomberg News.

‘Systemic Risk’

Mexican peso bonds have handed investors a loss of 13.2 percent this month, compared with an average decline of 8.2 percent for emerging-market debt denominated in local currencies, according to Bank of America Corp. U.S. Treasuries returned 2.5 percent in September.

“This time around, nothing’s been spared from this flight to quality,” Silva Capital’s Urbina said. “People are concerned with systemic risk. People are unsure what the impact of a potential messy default in Greece would be and what implication that would have on the international financial system. It’s panic. There is nothing that hasn’t gotten hit, except for Treasuries and the dollar.”

--Editors: Lester Pimentel, Jonathan Roeder

To contact the reporters on this story: Jonathan J. Levin in Mexico City at; Benjamin Bain in New York at

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

Too Cool for Crisis Management
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