Tequila Crisis Lessons Learned Before QE Unwind: Mexico Credit

Tequila Crisis Lessons Learned Before QE Unwind
Eighty percent of Mexico’s debt is in pesos, versus less than half in 1994, while the average coupon on the notes is 7.7 percent, the lowest ever. Photographer: Susana Gonzalez/Bloomberg

Mexico is proving to be one of the least-vulnerable countries to an increase in global interest rates by boosting the average maturity of its bonds to the highest of Latin America’s biggest economies.

The Mexican government has an average of 8.25 years to pay its $158 billion of peso debt, longer than Brazil, Argentina, Colombia and Venezuela and more than developed nations including the U.S., Canada and Switzerland, data compiled by Bloomberg show. Its debt maturity is now 14 times longer than the average of about seven months in 1994, when U.S. rate increases helped spark a peso devaluation that fueled capital flight and caused the so-called Tequila Crisis.

Mexico’s ability to extend maturities and lock in low rates as central banks around the world suppressed borrowing costs means the country is better able to withstand a jump in yields, as speculation increases the Federal Reserve will pare its unprecedented stimulus, Bank of America Corp. said. Eighty percent of Mexico’s debt is in pesos, versus less than half in 1994, while the average coupon on the notes is 7.7 percent, the lowest ever.

“They took advantage of the environment of low interest rates,” Claudio Irigoyen, the head of Latin America fixed-income and foreign exchange strategy for Bank of America, said in a telephone interview from New York. The mistake of the Tequila Crisis “was to try to get cheap short-term financing in dollars, and obviously that didn’t work.”

Yields Surge

Mexico has 200.6 billion pesos of bonds maturing this year, equal to 11 percent of its outstanding debt.

A press official for the Finance Ministry declined to comment on the nation’s debt profile.

Yields on Mexico’s benchmark peso bonds due in 2024 have risen 60 basis points, or 0.60 percentage point, in the past month and touched a six-month high of 5.56 percent June 10, according to data compiled by Bloomberg. Mexico’s 100-year dollar-denominated bonds, the longest-dated government securities in the world, have declined 12.04 cents on the dollar in the past month, pushing up yields by 59 basis points to 5.58 percent, data compiled by Bloomberg show.

While investors have suffered losses in Mexico’s longer-dated debt, which is more sensitive than shorter-dated bonds because they pay a larger number of coupons, the nation is better shielded from the risk of refinancing at higher rates.

U.S. Maturities

“Extending maturities and making the average life of the debt much longer always helps if you have any problems like we saw in 2008 and the market closes,” Henry Stipp, who oversees $3 billion as co-head of emerging-market fixed-income at Threadneedle Asset Management, said in a telephone interview from London. “It also helps the whole financial sector because it’s easier for a local bank to lend money because they can hedge themselves within the curve.”

The average maturity on U.S. debt is 5.4 years, according to data compiled by Bloomberg.

Roberto Ivan Garcia Castellanos, a bond trader at Casa de Bolsa Finamex SAB, said that while Mexico is better protected than peers, it’s not exempt from short-term swings in borrowing costs.

“The volatility we’re seeing is global,” Garcia Castellanos said in a telephone interview from Guadalajara, Mexico. “The longer-dated your bonds are, the more your average yields are going to rise.”

Default Swaps

The extra yield investors demand to own Mexican government dollar bonds instead of U.S. Treasuries rose four basis points, or 0.04 percentage point, to 199 basis points at 2:58 p.m. in New York, according to JPMorgan Chase & Co.

The cost to protect Mexican debt against non-payment for five years with credit-default swaps climbed one basis point to 128 basis points, according to data compiled by Bloomberg. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower fails to adhere to its debt agreements.

The peso fell 0.5 percent to 12.8947 per dollar. Yields on interbank rate futures contracts due in December, known as TIIE, rose one basis point yesterday to 4.31 percent.

Bank of America’s Irigoyen said longer maturities and inflation that hasn’t exceeded 5 percent since 2009 are helping limit increases in borrowing costs.

“They are extending maturities, they are keeping inflation low, and therefore they can issue with low risk premiums in the long end,” Irigoyen said. “They’re doing their homework.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE