Mexico's 100-Year Bond Sale Signals `Bubble' Building in Market, RBC Says
Mexico’s $1 billion sale of bonds due in 100 years raises concern the credit market is a approaching a “bubble” that’s blinding investors from making wise choices, RBC Capital Markets said in a report today.
“The market overlooks fundamentals at its peril,” RBC analysts Roger Appleyard and Simon Ballard wrote in a note titled “I’m Forever Blowing Bubbles.” “Enjoy the party while it lasts, but caveat emptor; the music will surely stop at some stage and when the party ends, the hangovers could be extreme.”
Mexico took advantage of global investor demand for higher- yielding, emerging-market debt amid record-low interest rates in Europe and the U.S. to sell the longest-maturity debt ever issued by a Latin American country. The government has raised $5.1 billion this year by selling debt in euros and dollars. Mexico plans to sell 150 billion yen ($1.82 billion) of 10-year Samurai debt as soon as Oct. 20, according to a person familiar with the offering.
“We are left feeling that this sort of trade is highly reminiscent of the height of the bull market era,” the analysts wrote. “It adds to our concern that the credit market is now pushing itself back into bubble territory, with memories still all too fresh as to how such a buoyant mood was brought to its knees last time.”
Investors may be overlooking “myriad obstacles” in the credit markets including “the continued denouement of the sovereign debt credit and possible restructuring in both Greek and Irish bond markets,” the London-based analysts wrote.
The prospect of higher interest rates next year will “risk making longer duration, lower quality investments today look far less attractive,” said the analysts, who added that they’re not changing their overall view on corporate credit markets.
The sale may pave the wave for other governments to sell similar-maturity debt, said Guillermo Osses, who helps oversee $50 billion in emerging-market assets at Pacific Investment Management Co.
“It wouldn’t be surprising, given how well this bond has performed in the market,” Osses, who’s based in Newport Beach, California, said in a telephone interview yesterday. “Brazil, for example, could fit very well that type of description.”
A Brazil finance ministry spokeswoman didn’t immediately return a call seeking comment. The person declined to be named in accordance with official policy.
Mexico begun studying issuing 100-year bonds about a year ago and made a decision after Rabobank Nederland NV and Norfolk Southern Corp. sold similar maturity debt in the last two months, said Gerardo Rodriguez, head of the finance ministry’s public debt unit, in an interview yesterday.
The government wanted to take advantage of record low yields to fund operations, he said. The yield on Mexico’s 5.125 percent dollar debt due in January 2020 fell to a record low of 3.607 last week.
The yield on the 100-year bonds rose two basis points, or 0.02 percentage point, to 5.794 percent at 10:05 a.m. New York time, according to BNP Paribas e-trading. Mexican bonds yield 156 basis points more than U.S. treasuries, according to JPMorgan Chase & Co.
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