Corporate Yield Spreads Swell to Eight-Month High on Growth: Mexico Credit
Investors are demanding the biggest yield premium in eight months to own Mexican corporate bonds, driving up borrowing costs for companies led by Cemex SAB and Desarrolladora Homex SAB.
Concern slowing growth in the U.S. will curb exports has helped push yields on Mexican dollar bonds relative to U.S. Treasuries higher by 23 basis points, or 0.23 percentage point, in the past month to 312 last week, the most since Oct. 19, according to JPMorgan Chase & Co. Brazilian companies’ overseas borrowing costs climbed 21 basis points during the same period to 281.
Mounting evidence of a slowdown in the U.S. economy, which buys about 80 percent of Mexico’s exports, is prompting investors to shun higher-yielding emerging-market assets. Latin America’s second-biggest economy grew 4.6 percent in the first quarter, less than the 5 percent median forecast in a survey by Bloomberg. Mexican policy makers said in a statement after their decision to keep interest rates at a record low last month that there was a “moderation in the pace” of the expansion.
“There’s less confidence in riskier assets,” Enrique Alvarez, head of Latin American fixed-income research at IdeaGlobal in New York, said in a telephone interview. “Mexico is affected, especially in the corporate side, by a more negative reading of U.S. economic data.”
The extra yield investors demand to hold Mexican government dollar bonds instead of U.S. Treasuries narrowed three basis points to 144 at 5 p.m. New York time, according to JPMorgan.
‘Work In Progress’
Cemex’s bonds due in 2020 yield 662 basis points more than Treasuries, up 87 basis points since May 13 and the highest since Dec. 6, according to data compiled by Bloomberg. The yields rose 44 basis points to 9.271 percent last week. Chief Financial Officer Fernando Gonzalez said on a conference call on April 29 that the housing-sector recovery in the U.S., the company’s biggest foreign market, “remains a work in progress.”
Jorge Perez, a Cemex spokesman in the Monterrey suburb of San Pedro Garza Garcia, didn’t immediately provide comment when contacted by telephone. Cemex, based in Monterrey, Mexico, is the largest cement producer in the Americas.
Borrowing costs for Culiacan, Mexico-based Desarrolladora Homex SAB, Mexico’s biggest homebuilder, also jumped, with the yield premium over Treasuries on its notes due 2019 widening 65 basis points over the last month to 563, the biggest since July 22, according to data compiled by Bloomberg. The yields increased 17 basis points last week to 8.18 percent.
Vania Fueyo, a Homex investor relations officer in Culiacan, didn’t respond to a message left at her office or two e-mails.
Standard & Poor’s rates Homex BB-, three levels below investment grade, and Cemex five steps below at B.
Concern the U.S. economic expansion is slowing drove “capital to safer assets,” said Alejandro Hernandez, who helps manage about $1.5 billion of debt at Interacciones Casa de Bolsa SA in Mexico City. “The quality of U.S. debt is greater than Mexican corporate bonds.”
The yield on the U.S. 10-year note fell to a six-month low of 2.92 percent on June 9, two days after Federal Reserve Chairman Ben S. Bernanke said the economic recovery is “frustratingly slow.”
The peso rose 0.4 percent to 11.8582 per U.S. dollar today.
Manufacturing in the U.S. grew at its slowest pace in more than in year in May, while the unemployment rate unexpectedly climbed to 9.1 percent.
The cost to protect Mexican debt against non-payment for five years widened 1 basis point to 109 today, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.
Yields on futures contracts for the 28-day TIIE interbank rate due in December were unchanged at 5 percent, indicating traders expect the central bank to raise the rate by then.
Mexico is the only major Latin American nation to keep interest rates unchanged in the past year. Consumer prices fell 0.74 percent in May, the most in 42 years, the central bank said last week.
Demand for Mexican corporate debt will rebound, driving borrowing costs lower, as signs emerge the U.S. recovery is on track, said Jack Deino, who oversees about $1.8 billion of emerging-market debt at Invesco Inc. in New York.
“We are going through a slow patch here, but it’s not a recession or anything really to worry about,” Deino said in a telephone interview. “It’s unrealistic to think of it as straight arrow back up.”
The world’s largest economy will probably recover from recent weakness in part because a surge in commodity prices, the earthquake in Japan and “severe weather” in the U.S. are transitory, Federal Reserve Bank of New York President William C. Dudley said on June 10 in a speech in Brooklyn, New York, to the Caribbean-American Chamber of Commerce and Industry.
“I anticipate that economic growth will pick up enough in the second half of 2011 to sustain a moderate economic recovery,” Dudley said.
Mexican corporate bond sales in overseas markets have tumbled in part on concern growth is slowing, said Miguel Angel Aguayo, a fixed-income analyst at Grupo Financiero Banorte SAB.
Debt offerings in dollars have totaled $10 billion this year, down 29 percent from the same period in 2010, according to data compiled by Bloomberg.
“Last year a lot of Mexican companies came to market taking advantage of an increased appetite for riskier assets,” Aguayo said in a telephone interview from Mexico City. “Markets have closed a little bit since. Some investors are concerned about the latest economic figures. The most extremist are even talking about a double-dip recession.”
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