Mexican notes are beating the average return for emerging-market debt as signs the U.S. economy is rebounding help spark the biggest peso rally in a year.
Peso bonds gained 7.2 percent in October in dollar terms, the biggest monthly advance since March 2009 and topping the average 3.2 percent increase for local-currency developing-nation debt, according to Bank of America Corp. Yields on Mexican notes due in 2024 fell 36 basis points, or 0.36 percentage point, last month to 6.47 percent, data compiled by Bloomberg show.
Evidence the expansion in the U.S., the destination for 80 percent of Mexico’s exports, is picking up strength fueled a 4.1 percent appreciation in the peso last month, the most since September 2010. Mexican bonds also benefitted from renewed demand for higher-yielding, emerging-market assets after European leaders outlined a plan to stem the region’s debt crisis.
“Surprisingly positive” U.S. economic data is helping boost investor confidence in Mexico’s economy, Enrique Alvarez, head of Latin America research at IDEAGlobal in New York, said in a telephone interview. “Obviously that feeds well into the overall risk acceptance into Mexico.”
The U.S. economy grew 2.5 percent in the third quarter, the fastest pace in a year. Total consumption, which accounts for about 70 percent of the U.S. economy, rose 2.4 percent last quarter. Retail sales increased 1.1 percent in September, the most in seven months, and vehicle sales climbed 3.6 percent, the best since March 2010.
Mexico’s economy probably expanded 3.7 percent in the third quarter, the Finance Ministry said Oct. 28 on its website.
Mexican bonds will extend their rally for another month after European leaders’ plan to boost the region’s rescue fund prompted investors to buy higher-yielding assets, said Alejandro Urbina, who oversees $800 million of assets at Silva Capital Management in Chicago.
French President Nicolas Sarkozy said last week that the euro region’s bailout fund will be leveraged by four to five times and that investors have agreed to a voluntary writedown of 50 percent on Greek debt.
“What took over the market over the past weeks or months has been a hurricane that left my head spinning,” Urbina said in a telephone interview. “Now that we’ve found at least the beginning of a resolution to this European problem, it’s the reverse of that.”
The rally in Mexican peso bonds may falter if optimism about Europe’s efforts to solve its debt crisis fade, said Vitali Meschoulam, head of Latin America strategy at Morgan Stanley.
Italian and Spanish bonds fell yesterday amid concern European leaders will struggle to magnify the capacity of their rescue fund to 1 trillion euros ($1.4 trillion).
“It’s really dependent on how bad things get” in Europe, Meschoulam said in a telephone interview from New York. “Most of the investment decisions that are being taken right now are being taken on what the outlook is for Greek debt, not what the outlook is for Mexican interest rates, or Mexican inflation, or growth over the next 15 years.”
The peso fell 1.9 percent to 13.6136 per U.S. dollar today.
The extra yield investors demand to hold Mexican government dollar bonds instead of U.S. Treasuries rose 10 basis points to 231, according to JPMorgan.
The cost to protect Mexican debt against non-payment for five years rose 14 basis points to 152, 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.
Yields on futures contracts for the 28-day TIIE interbank rate due in December rose four basis points today to 4.75 percent.
The peso is rebounding from an 11.3 percent plunge in September, when concern Europe’s debt crisis was worsening and the U.S. economy was slipping into recession crimped demand for Mexican assets.
“You had a very depreciated peso throughout the month, which means for foreign investors looking at the bonos market there were a lot more advantages in climbing back in and accumulating positions in that market because the currency was just so cheap,” IDEAGlobal’s Alvarez said, referring to fixed-rated Mexican debt known as bonos. “On the other side, as far as curve expectations are concerned and monetary policy expectations, the sense has pretty much become ingrained in the market that we’re going to see lower rates.”