Mexican Yields Drop to Record as Spain’s Borrowing Costs Soar

Mexican bond yields fell to a record low as investors sought refuge for their money outside of Europe after Spain’s borrowing costs rose to a euro-era high.

The yield on Mexican local-currency bonds due in 2024 dropped nine basis points, or 0.09 percentage point, to 5.92 percent at 4 p.m. in Mexico City, the lowest closing level since the securities were issued in January 2005. The price increased 0.93 centavo to 135.98 centavos per peso. The peso appreciated 0.7 percent to 13.8284 per dollar.

The Latin American nation’s securities rallied after a jump in bad Spanish loans sent yields on its 10-year bond above 7 percent for the first time since Europe’s currency was introduced in 1999. The correlation in performance between Mexican peso bonds and U.S. Treasuries, considered the world’s safest debt, turned positive this month for the first time since November.

“The driver continues to be the overall European saga of potential insolvency on the sovereign side,” said Enrique Alvarez, the head of Latin America fixed-income research at IdeaGlobal in New York.

The 120-day correlation coefficient between 10-year Mexican government bonds and similar-maturity Treasuries is 0.08. A reading of 1 means the two securities move in lockstep while -1 indicates they move in opposite directions. The yield on 10-year U.S. Treasuries was little changed at 1.57 percent, after earlier touching 1.56 percent, the lowest intraday level since June 8.

Bad loans as a proportion of total Spanish lending jumped to 8.72 percent in April, the highest since 1994, from 8.37 percent in March, the Bank of Spain said on its website today.

Hunt for Yield

While the correlation with Treasuries is helping push Mexican bond yields down, investor demand for higher-yielding assets is the longer-term driver for the securities’ rally, according to Alvarez.

“The lower yields that we’re seeing in Mexico are a result of these unsustainable yields that you’re seeing in Spain and Italy, which telegraph that you’re going to have a more profound European crisis to come,” Alvarez said by phone.

Italian 10-year bond yields increased 16 basis points to 6.08 percent, according to data compiled by Bloomberg. They rose even as Greek parties backing a bailout won enough seats to form a government, easing concern Greece would leave the euro.

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