The bond market is showing that Mexico is closer than ever to its northern neighbor, according to Alejandro Diaz de Leon, the nation’s head of public debt.
A measure of the correlation between U.S. Treasuries and fixed-rate government bonds from Mexico rose to a record on Thursday. And even as the Federal Reserve prepares to raise interest rates later this year, which may reduce demand for higher-yielding emerging-market assets, investors have continued to pile into Mexico’s debt, with the percentage held by foreigners now at 59 percent, close to a 15-year high.
Diaz de Leon said he doesn’t expect a significant retreat by foreigners from Mexican debt once the U.S. raises borrowing costs for the first time since 2006. The two countries’ economies and monetary policy are mostly synched, he said. Mexico sends about 80 percent of exports to the U.S., and Bank of Mexico Governor Agustin Carstens has said the Fed will be a key factor in its own decisions on rate increases.
“The high correlation today is a reflection that the single most important piece of information for fixed-income markets is the pace, the expected path of an increase in interest rates in the U.S.,” Diaz de Leon said. “Other emerging markets are not so closely linked.”
The 60-day correlation coefficient between 10-year Treasuries and similar-maturity Mexican bonds rose to more than 0.69 on Thursday, the highest in data going back to 2001. A correlation of 1 means the two assets move in lockstep.
According to Bloomberg surveys of economists, Mexico’s central bank will probably keep rates on hold until the third quarter, when it will raise them along with the Fed.
Foreign investments in Mexico’s bonds appear more sensitive to Fed policy decisions than the Bank of Mexico’s stance, Royal Bank of Canada analysts led by Daniel Tenengauzer wrote Friday in a research note to clients. Since the Fed first announced it was reducing asset purchases in 2013, global holdings of the Mexican debt seem “to flip more often and more quickly,” they wrote.
Yields on Mexican government bonds due in 2024 fell 0.02 percentage point to 5.79 percent Friday as of 12:41 p.m. in Mexico City. The peso slipped 0.3 percent to 15.4069 per dollar.
In the meantime, foreign investors have continued to seek out Mexican bonds, said Alejandro Urbina, a money manager at Silva Capital Management LLC, which oversees $180 million.
“There will continue to be a spread to U.S. rates,” he said in an e-mail. “It’s all about making more money.”
While Mexican bonds may suffer losses as the Fed raises rates, they probably won’t get hit as hard as those from other emerging markets, Diaz de Leon said.
“I do see that the adjustment process in Mexican markets has been more orderly than in other emerging markets,” Diaz de Leon said. “Going forward we would expect that to continue.”