Century Bond Sale Proves Prescient as Yields Jump: Mexico Credit

April 28 (Bloomberg) --Mexico is proving the winner over bondholders who purchased 100-year bonds a week before benchmark U.S. yields surged from a 20-month low.

The government’s $1 billion of notes due in 2110 have lost 6.1 percent since they were sold in October, the biggest decline among the country’s dollar bonds during that period, according to data compiled by Bloomberg. Mexican dollar debt has posted an average loss of 2 percent since October, according to JPMorgan Chase & Co.

A strengthening U.S. economy has driven benchmark 10-year Treasury yields up 93 basis points since Oct. 7, punishing holders of the longest-maturity dollar securities because their prices are the most sensitive to interest-rate changes. Mexico joined U.S. railroad operator Norfolk Southern Corp. and Rabobank Nederland NV, the world’s largest agricultural lender, last year in locking in borrowing costs for a century. It was the only country to sell such debt in 2010.

“Well done to Mexico,” Jeremy Brewin, who helps oversee about $3 billion of emerging-market assets at Aviva Investors in London, said in a telephone interview. “Over time, it’s going to be one of their best decisions.”

The yield on Mexico’s so-called century bonds has risen 29 basis points, or 0.29 percentage point, since it was sold on Oct. 5, to 6.39 percent, according to data compiled by Bloomberg. Yields on the 30-year Treasury bonds, the closest U.S. maturity, climbed 71 basis points in the period to 4.56 percent.

Ten-year and 30-year debt of the U.S., the world’s largest economy, are the benchmarks against which the relative value of all other bonds in the world are compared.

Global Performance

Globally, government bonds maturing in 10 years or more have lost 5.8 percent since October, compared with a decline of 0.5 percent for bonds due in one to five years, according to Bank of America Merrill Lynch.

The selloff in the 100-year bonds is “really a Treasury effect” rather than a reflection of deterioration in Mexico’s creditworthiness, said Jeff Williams, an emerging-market debt strategist at Citigroup Inc. in New York.

“In any of these long-dated bonds, you are exposed to the Treasury risk,” Williams said in a telephone interview. “It’s bad from investors’ point of view, but from the government’s point of view, it’s certainly good to lock in low rates for a long period of time.”

Treasuries’ Impact

A prolonged increase in Treasury yields may deepen the selloff in the 100-year bonds, Brewin said.

“I am still nervous about owning things that haven’t been tested in a true bear market,” Brewin said. “In a down market, where U.S. Treasury yields move up and the long end comes under pressure, will there be enough potential buyers?”

Investors asked at the last sale of dollar debt whether Mexico would sell more of the century bonds, Alejandro Diaz de Leon, head of public debt at the Finance Ministry, said in an interview. The government doesn’t have plans to sell more but hasn’t ruled it out, he said.

“There is still a lot of appetite from investors, especially institutional investors who are looking for longer- term assets to immunize against shocks from other holdings,” Diaz de Leon said. “This was a great opportunity for Mexico to be able to sell this and create a profile for debt at this maturity.”

KBC’s Hedge

KBC Asset Management SA, which owns Mexico’s 100-year bond, hedged against a jump in Treasury yields in the futures market to protect the value of its investment, according to Lazlo Belgrado, who helps manage 5 billion euros of emerging-market bonds in Luxembourg.

The bonds are still attractive and cheaper than Mexican notes due in 2040, Belgrado said. The 100-year securities yield 57 basis points more than the 2040 bond, according to data compiled by Bloomberg.

“You have quite a nice yield pickup,” Belgrado said. “Mexico is one of the top credits in the emerging markets. It’s a good investment.”

The extra yield investors demand to hold Mexico’s century bond instead of 30-year U.S. Treasuries has narrowed 18 basis points since Oct. 6 to 194. The average spread for Mexican dollar bonds, a measure of the credit risk for the country, has narrowed 25 basis points to 134 in that time, according to JPMorgan’s EMBI+ index.

Swap Price

The cost to protect Mexican debt against non-payment for five years rose one basis point yesterday to 100, according to CMA. Credit-default swaps pay the buyer face value in exchange for the underlying securities or cash equivalent if the issuer fails to comply with debt agreements.

Yields on the interbank rate futures contract, known as TIIE, due in September fell one basis point to 5 percent yesterday, indicating that traders expect a rate increase that month.

The peso fell 0.2 percent to 11.5453 per U.S. dollar.

Life-insurance companies and pension funds favor 100-year bonds because they can match their long-term liabilities with assets of similar maturities, according to Aviva’s Brewin.

China issued $100 million of 100-year bonds in 1996 while Chile’s Empresa Nacional Electricidad SA and India’s Reliance Industries Ltd. have also sold such bonds.

Mexico doubled the size of the October sale from an initial $500 million plan, taking advantage of global investor demand for higher-yielding, emerging-market debt amid the record-low interest rates in Europe and the U.S.

“It was a very wise move,” said Gunter Heiland, who helps oversee $2.1 billion of emerging-market assets at Greenwich, Connecticut-based investment fund Gramercy. “They are able to lock in borrowing for an extremely long time.”

To contact the reporters on this story: Ye Xie in New York at yxie6@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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