Mexico Bond Correlation to Treasuries Surges on Fed Speculation

The correlation between Mexico bonds and U.S. Treasuries is rising to an eight-week high on speculation the Federal Reserve will pare stimulus this year, damping demand for both countries’ securities.

The 30-day correlation coefficient between 10-year Mexican government bonds and similar-maturity Treasuries rose to 0.64 today, the highest closing level since Sept. 18. A reading of 1 means the two securities move in lockstep while -1 indicates they move in opposite directions. The peso increased 0.8 percent to 13.0783 per dollar at 10:41 a.m. in Mexico City.

Speculation that the Federal Reserve may reduce its $85 billion in monthly bond purchases next month has mounted since a U.S. Labor Department report showed last week that companies hired more workers than forecast in October. Federal Reserve Bank of Atlanta President Dennis Lockhart said yesterday a paring of U.S. bond purchases “could very well take place” next month.

“We’re data dependent again,” Kevin Daly, who helps oversee about $10 billion in emerging-market debt including Mexican government bonds at Aberdeen Asset Management Plc, said in a telephone interview from London. “We’re looking at a situation where we’re starting to think tapering, that’s not good for risky assets, that’s not good for emerging markets. So in the meantime that’s why you get these positive correlations to Treasuries.”

Yields on fixed-rate government peso bonds maturing in 2024 have increased 39 basis points, or 0.39 percentage point, in the past month to 6.28 percent, according to data compiled by Bloomberg. Yields on similar-maturity U.S. Treasuries have risen five basis points over the period to 2.8 percent.

To contact the reporter on this story: Ben Bain in Mexico City at bbain2@bloomberg.net

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

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