Corporate Bonds Beaten by Stocks on GDP Outlook: Mexico Credit

Mexican corporate debt is lagging behind stocks by the most in eight months as investors bet a rebound in U.S. economic growth will fuel bigger gains in the equity market.

The 0.4 percent decline in dollar debt sold by companies in the past 30 days compares with an advance of 4.6 percent for the benchmark IPC stock index, the biggest underperformance since Nov. 5, according to JPMorgan Chase & Co. and Bolsa Mexicana de Valores SAB. Brazilian corporate bonds gained 0.8 percent in the past month, compared with a 1.4 percent loss for the nation’s Bovespa stock index.

The prospect that the expansion in the U.S, the destination for 80 percent of Mexican exports, will accelerate in the second half of the year is helping fuel gains in global equity markets. While quickening growth will help bring down Mexican corporate bond yields from a two-month high of 6.4 percent last week, shares in the country’s stocks have more room to rally after trading at the cheapest level in almost two years in June, said Alonso Madero, who helps oversee $5.5 billion of debt at Corp. Actinver SAB.

The U.S. economy is “going to give us a very favorable surprise in the second half of the year,” Madero said in a telephone interview from Mexico City. “That set off a migration from corporate bonds and a return to equities.”

The average yield on Mexican corporate bonds rose 16 basis points, or 0.16 percentage point, in the past month and reached 6.40 percent on June 29, the highest since April 11, according to JPMorgan. The earnings yield in pesos on the IPC index was 5.82 percent yesterday, down from 6.10 percent a month ago, according to data compiled by Bloomberg.

Equity Rally

Corporate debt posted the biggest slump in 13 months in June as growth in Latin America’s second-biggest economy slowed. Mexico’s economy expanded 2.4 percent in April, the slowest pace since December 2009, the national statistics agency said on June 28.

Mexican stocks are also beating corporate bonds after concerns Greece may default eased, boosting demand for equities globally, said David Spegel, the global head of emerging-market strategy at ING Financial Markets in New York.

Greek Prime Minister George Papandreou survived a no- confidence vote on June 21, changed his finance minister and pushed 78 billion euros ($113 billion) in new austerity measures through parliament, positioning the country to receive more European Union aid. The MSCI World (MXWO) Index of stocks has gained 3.8 percent in the past week.

‘Growth Environment’

“In an environment such as we had in the past week, you would expect equities would outperform,” Spegel said in a telephone interview. “Mexico looks more aligned from an equity perspective. Equity typically outperforms debt in a growth environment.”

Mexican stocks are unlikely to continue their advance as growth in the U.S. economy will remain sluggish, said Martin Gonzalez, an equity analyst at Invex Casa de Bolsa SA in Mexico City.

“This is about the market exhaling a bit,” Gonzalez said in a telephone interview. “Things haven’t changed much.”

The extra yield investors demand to hold Mexican government dollar bonds instead of U.S. Treasuries widened 4 basis points to 126 basis points, according to JP Morgan.

The cost to protect Mexican debt against non-payment for five years was little changed at 106 basis points, 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.

Rate Outlook

The peso fell 0.4 percent to 11.6355 per U.S. dollar yesterday. It’s down 0.6 percent since the end of May, the second worst-performing currency in Latin America after the Argentine peso.

Yields on futures contracts for the 28-day TIIE interbank rate due in January rose one basis point to 4.95 percent, indicating traders expect the central bank to raise the rate in February. Mexico is the only major Latin American country to keep borrowing costs unchanged in the past year.

Inflation in Mexico slowed to 3.2 percent in the 12 months through mid-June and reached a five-year low of 3.04 percent in March. Prices in the U.S. rose 3.6 percent in May.

Orders placed with U.S. factories increased in May, indicating manufacturing may rebound from a slowdown in economic growth in the first half of 2011, the Commerce Department said yesterday.

Mexico’s benchmark gauge of stocks may climb 15 percent to 42,000 by the end of the year, Monex Casa de Bolsa SA analyst Carlos Gonzalez Tabares said in a telephone interview.

“We’re seeing better data in the U.S.,” Actinver’s Madero said. “The Greece problem is starting to get resolved. You start to put all these pieces together and you say, ‘Wow, the world really isn’t that bad.’”

To contact the reporters on this story: Jonathan J. Levin in Mexico City at jlevin20@bloomberg.net; Veronica Navarro Espinosa in New York at vespinosa@bloomberg.net

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

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