Pimco Love Affair Repels Pensions as Mexico Allure Fades
Known locally as Afores, their share of Mexico’s government debt fell to a 12-year low of 18 percent this month. The funds are allocating less money to Mexican peso notes as unprecedented investment by foreign investors, including Gross’s Pacific Investment Management Co., triggered a rally that cut yields on debt due in 2024 to a record low of 5.1 percent in July.
While bond investors facing near-zero interest rates in the U.S., Europe and Japan have piled into Mexico searching for higher returns, the country’s $144 billion pension fund market is funneling more cash into stocks and preparing to invest in commodities as assets under management are projected to double in the next five years. Mexican bonds have returned 20.6 percent in dollars this year, or twice the emerging-market average, limiting the scope for further gains, Aviva Investors Ltd. said.
“The fact is, foreigners have come in, yields have collapsed and Afores now find themselves with much lower expected returns for any new cash that they expect to invest,” Kieran Curtis, who helps manage about $4.5 billion in emerging- market debt including Mexican fixed-rate bonds at Aviva, said in a telephone interview from London.
Yields on peso bonds due in 2024 have plunged 114 basis points, or 1.14 percentage points, this year to 5.53 percent, according to data compiled by Bloomberg.
Pimco, the world’s largest manager of bond funds, said Oct. 3 that Mexican local debt was one if its favorites, three months after Gross said he preferred them over German bunds.
The firm owns 18.4 billion pesos ($1.4 billion) of the bonds maturing in 2024.
Mexico “will continue to be a natural alternative for global pools of capital,” Michael Gomez, managing director and co-head of emerging markets at Pimco, said in an e-mail message on Oct. 19. “Global fixed income investors are increasingly searching for global options to diversify away from the low nominal and negative real yields that characterized much of the developed-world fixed income markets.”
Foreigners’ holdings of fixed-rate peso bonds climbed to a 12-year high of 52 percent on Oct. 10 from 40 percent a year earlier, according to the central bank. The nominal amount of the bonds held by overseas investors reached a record Oct. 10.
While the Federal Reserve and European Central Bank have held rates near zero or purchased assets since July 2009 to spur economic growth, Mexico has kept its borrowing costs at 4.5 percent, the only Group of 20 nation to stand pat in that span.
Mexico’s peso bonds due in 2024 yield 3.54 percentage points more than similar-maturity Treasuries and 3.82 percentage points more than German bunds.
Assets under management by the pension funds, which have grown at an average annual rate of 18 percent in the five years through September to 1.85 trillion pesos, may double in the next half decade, Pedro Ordorica, the head of industry regulator Consar, said in an interview last month.
While Mexican government bonds are still a “good investment,” there may be more value in other assets, according to Javier Orvananos, the chief investment officer for Citigroup Inc.’s Banamex pension funds, the country’s largest by assets.
“There’s more value in equities, in commodities and in alternatives than in traditional fixed income,” Orvananos said in an interview at his office in Mexico City on Sept. 25. “We need to start looking at options for the future markets. So that is why over the long term we’re probably going to start to prefer other asset classes than fixed income.”
Orvavanos didn’t return telephone calls seeking further comment.
Mexican stocks have gained 22.5 percent this year in dollar terms, outpacing returns on local currency government bonds.
Pensions had 57 percent of their 1.85 trillion pesos in government debt at the end of September, versus 67.5 percent three years earlier, according to industry regulator Consar. The percentage of their funds in international stocks almost tripled to 12.8 percent in the same period.
Antonio Sibaja, deputy director of investment at Afore XXI Banorte, the nation’s fourth-largest pension by assets, says that peso bonds still have room to rally.
Yields are “still not at the lowest levels,” Sibaja said in a telephone interview from Mexico City. “In general, we have confidence in the future good performance of local assets.”
The extra yield investors demand to own Mexican government dollar bonds instead of U.S. Treasuries fell three basis points today to 144 basis points, according to JPMorgan Chase & Co.’s EMBI Global index.
The cost to protect Mexican debt against non-payment fell one basis point to 100 basis points, data compiled by Bloomberg show. 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.
The peso rose 0.2 percent to 12.8631 per dollar. Yields on Mexican interbank rate futures contracts due in December, known as TIIE, were unchanged last week at 4.82 percent.
Pension funds are rebalancing their assets to invest as much as 10 percent of holdings in commodity-linked securities and to increase stocks after the industry regulator revised rules to allow greater flexibility. Afores were barred from investing in commodities when the system was privatized in 1997.
“It’s a game for the future,” Aviva’s Curtis said. “The lower the yields are in Mexico, the more likely the Afores are to find attractive investments overseas.”
To contact the reporter on this story: Ben Bain in Mexico City at email@example.com