Long-Bond Carnage Looms for Mexico as Fed Prepares to Lift Rates

Updated on

For bond investors in Mexican companies stung by lackluster returns, it’s likely to get worse.

While dollar-denominated corporate bonds in emerging markets have returned 4 percent this year, those from Mexico have just gained 0.5 percent.

And because long-dated notes that are more sensitive to interest-rate increases make up a disproportionate amount of the nation’s corporate debt, the underperformance is likely just a prelude to losses in the second half as the U.S. Federal Reserve prepares to boost benchmark borrowing costs.

“Mexican bonds should underperform,” Nick Chamie, chief investment officer at Bank of Nova Scotia’s international wealth management unit, said from Toronto. “The price sensitivity, the impact on return, would still be bigger at the long-end.”

Companies in Mexico account for more than half the $63.2 billion of debt due in 25 years or more that have been issued in Latin America in the past decade, leaving their bonds the most sensitive to losses when rates rise, based on a bond metric known as duration.

The longer-dated bonds of companies led by state-owned oil producer Petroleos Mexicanos are already some of the worst performers in Mexico. Pemex’s $3 billion of notes due in 2046 have lost 6 percent this year, while similar-maturity debt from breadmaker Grupo Bimbo SAB and broadcaster Grupo Televisa SAB have slumped at least 4.9 percent.

Fed Forecast

Last week, the Fed kept its forecast for rates to begin rising this year, with central bank officials projecting the rate will rise to 0.625 percent in 2015, according to their median estimate. That implies two quarter-point increases. Next year, they expect the rate to climb to 1.625 percent.

While Mexican companies’ longer-dated, investment-grade bonds are faltering, the nation’s junk-rated corporate debt has gained 4.6 percent so far this year.

“We still see opportunities,” Cornel Bruhin, who helps manage about $750 million in emerging-market corporate bonds at MainFirst Schweiz AG, said from Zurich. “Investment grade, of course, it’s vulnerable to an interest-rate change, but not the very, very high-yield stuff.”

Mexico’s peso weakened 0.6 percent Friday to 15.5718 a dollar as of 1:47 p.m. in Mexico City.

At 7.33 years, the modified duration of Mexican corporate debt is the longest among 19 Latin American and Caribbean countries, data compiled by Bloomberg show.

Duration Danger

Mexico’s corporate bonds are not the only securities in the country vulnerable to losses as the Fed lifts rates.

At 20 years, Mexico’s dollar-denominated debt boasts the longest average maturity among major developing nations, data compiled by Bloomberg show. The country, which has issued three 100-year bonds, has seen its dollar debt slump 2.5 percent this year, double the emerging-market average.

“People are concerned about duration,” Siddharth Dahiya, the head of emerging-market corporate debt at Aberdeen Asset Management Plc, said by telephone from London. “Anything with longer duration gets hit.”

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