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JPMorgan Says Buy Long Bond as 10-Year Sales Jump: Mexico Credit

Cranes Stand on the Skyline in Mexico City
JPMorgan is recommending investors turn to Mexico’s longer-maturity debt to profit from the nation’s biggest economic reforms in two decades while sidestepping a yield surge in 10-year debt as the government sells more of the notes. Photographer: Susana Gonzalez/Bloomberg

Mexico’s plan to boost sales of short-term debt to finance its biggest budget deficit in four years is prompting JPMorgan Chase & Co. to recommend the nation’s 30-year bonds.

The extra yield investors demand to own Mexican peso notes due in 2042 over 10-year debt shrank 0.28 percentage point last month, the most since January 2008, to 1.12 percentage points according to data compiled by Bloomberg. While yields on Mexico’s 30-year bonds fell 0.07 percentage point in December, those on similar-maturity debt from the U.S. to Switzerland jumped an average of 0.16 percentage point as the Federal Reserve’s decision to curb its unprecedented stimulus eroded demand for longer-dated securities.

JPMorgan is recommending investors turn to Mexico’s longer-maturity debt to profit from the nation’s biggest economic reforms in two decades while sidestepping a yield surge in 10-year debt as the government sells more of the notes. Mexico’s approval of a bill to open the country’s energy industry to more private investment and a ratings upgrade from Standard & Poor’s are helping boost demand for the country’s 30-year bonds, according to Silva Capital Management LLC.

“We experienced curve behavior that finally decoupled from the taper tantrum,” Alejandro Urbina, who helps manage $800 million at Silva Capital, wrote in an e-mailed response to questions from El Paso, Texas. “High-duration bonds did relatively well, which is an indication that investors had appetite for risk in Mexico.”

Deficit Widening

Mexico’s budget shortfall will swell to 1.5 percent of gross domestic product this year from 0.4 percent in 2013. To help cover the deficit, the country will increase sales of three-, five- and 10-year bonds in the first three months of 2014 while keeping issuance of 20- and 30-year debt unchanged, the Finance Ministry said on Dec. 19.

Yields on Mexico’s 10-year bonds have climbed six basis points, or 0.06 percentage point, in the past month to 6.41 percent and touched a three-month high on Dec. 26, according to data compiled by Bloomberg.

The government will sell 8.5 billion pesos ($646 million) in 10-year bonds every six weeks in the first quarter, a 6.25 percent jump from the last three months of 2013. The sale of 30-year notes will remain at 3.5 billion pesos every six weeks, the Finance Ministry said in a statement Dec. 19.

The peso rose 0.4 percent today to 13.1061 per dollar as of 2:35 p.m. in New York.

The government is stepping up sales of short-term securities at a time of “reduced appetite for long-term instruments,” public debt chief Alejandro Diaz de Leon said in an interview on Dec. 19.

‘Supply Risks’

The Fed said Dec. 18 it will cut monthly bond buying to $75 billion from $85 billion.

Total net issuance of so-called Mbonos, or fixed-rate peso notes, will increase 30 percent this year to 594 billion pesos, Carlos Carranza, a strategist at JPMorgan, wrote in a report Dec. 20.

“Given the distribution of supply risks for next year and recent developments in the Mexico market” investors are better off selling 10-year bonds to buy 30-year bonds, Carranza said. “Mexico’s fundamental story looks attractive on a relative basis within EM.”

S&P raised Mexico’s rating to BBB+ from BBB on Dec. 19 after the legislature approved constitutional changes to allow private companies to drill for oil in the country for the first time in 75 years, calling the bill’s passage a “watershed moment.”

Mexico’s long-term average annual economic growth will increase to 4 percent, S&P estimates, compared with 3 percent prior to the changes.

‘Frustrating Trade’

Siobhan Morden, head of Latin America fixed-income strategy at Jefferies Group LLC, said betting on 30-year bonds is risky because the performance of Mexico’s local debt will also be affected by trends in U.S. Treasuries.

“It’s been a frustrating trade,” Morden said in an e-mailed response to questions. “Maybe we need to see the impact on the real economy since asset prices now in Mexico are mostly still trading on U.S. markets.”

Foreign investors favor Mexico’s shorter-term notes, making them “more sensitive to the tapering process” than longer-dated bonds, according to Marco Oviedo, the chief Mexico economist at Barclays Plc.

As of Dec. 19, foreign investors held 46 percent of outstanding notes that mature between 2029 and 2042, compared with 70 percent of Mbonos maturing between 2020 and 2024, according to data compiled by the central bank.

“The 42s should reflect the improved medium-term growth outlook more clearly,” Oviedo said in an e-mailed response to questions.

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