One-Hundred-Year Bond Wipeout in Mexico Triggered by Fed
Three years after Mexico took advantage of the Federal Reserve’s unprecedented stimulus effort to sell the world’s longest-dated government debt, the Latin America nation’s timing is proving to be prescient.
Mexico’s bonds due 2110 have plunged 21.2 cents since Fed Chairman Ben S. Bernanke said on May 22 that policy makers may taper their monthly asset purchases of $85 billion. On a total return basis, the 17.4 percent decline was the most among investment-grade sovereign notes maturing in 30 years or more, according to data compiled by Bloomberg. At 92.94 cents on the dollar, the 100-year bonds currently trade below their issue price of 94.276 cents and yield 6.19 percent.
While Mexico locked in a fixed rate of 5.75 percent annually to borrow $2.7 billion for a century, bondholders have been blindsided by a jump in Treasury yields spurred by concern the Fed will curb its bond-buying program as soon as today. The correlation between the 30-year U.S. notes and the 100-year bonds reached an all-time high this month. Modified duration, which measures a bond’s sensitivity to rate changes, was 16 for Mexico’s 100-year notes, compared with 13.8 for Brazil’s longest-dated dollar-denominated notes, which mature in 2041.
“The speed with which U.S. rates have come up makes Mexico’s decision to issue look so much better,” Joe Kogan, head of emerging-market strategy at Scotiabank, said by phone from New York. “Bad for investors, but certainly Mexico seems to have found the right time to issue such a long-duration bond and lock in rates.”
An official in the Finance Ministry’s press office didn’t respond to telephone and e-mailed messages seeking comment on the performance of the country’s 100-year debt.
Yields on the 2110 bonds have surged 1.16 percentage points since before Bernanke’s May 22 comments, according to data compiled by Bloomberg. Those on the U.S. 30-year note have increased 0.7 percentage point to 3.83 percent over the same period. The century bonds lost the most among fixed-rate sovereign bonds with at least $500 million outstanding and investment grade ratings over the period, according to data compiled by Bloomberg.
Fed policy makers are finishing up a two-day meeting today and will probably lower the monthly pace of their asset purchases by $5 billion to $80 billion, according to the median responses of economists surveyed by Bloomberg. Bernanke has said he expects the Fed to complete its asset-purchase program in the middle of next year when the unemployment rate is about 7 percent, down from August’s 7.3 percent.
While the century bond sale three years ago was a “great deal for Mexico,” it implied “a sizable duration risk” to bondholders, according to Robert Abad, a money manager who helps overseas $51 billion at Western Asset Management in Pasadena, California.
“The steady rise in long-end U.S. rates caused that risk to materialize in a pretty marked way,” Abad said in an e-mailed response to questions.
A percentage point yield jump for Mexican 2019 dollar debt would translate into a price decline of 5.48 cents on the dollar, one-third the price drop a similar yield increase would provoke in a century bond, data compiled by Bloomberg show.
Roberto Sanchez-Dahl, who oversees about $2.5 billion in emerging-market debt at Manulife Asset Management in Boston, said the 100-year bonds will probably rebound as the Fed is likely to reiterate its pledge to keep its key interest rate near zero even as it pares asset purchases.
The central bank said in July near-zero borrowing costs will be appropriate as long as the unemployment rate remains above 6.5 percent and the inflation outlook doesn’t exceed 2.5 percent.
“What they may change is the language about expectations for increases in interest rates,” Sanchez-Dahl said by phone. “That’s what would make the market a bit more positive.”
Sanchez-Dahl said he bought the 100-year bonds from the government and sold them in 2012 when he was a portfolio manager at Federated Investment Management Co.
The extra yield investors demand to own Mexican government dollar bonds instead of Treasuries fell six basis points, or 0.06 percentage point, to 186 basis points at 11:22 a.m. in New York, according to JPMorgan Chase & Co.
Mexico’s five-year credit default swaps, contracts that protect holders of the nation’s debt from non-payment, fell three basis points to 104 basis points, according to data compiled by Bloomberg. The peso weakened 0.4 percent to 12.9693 per U.S. dollar.
Mexico initially sold the century bond in October 2010 and issued more of the securities in follow-up offerings August 2011 and August 2012, according to data compiled by Bloomberg.
“I wonder if they’re wishing they had done more,” Scotiabank’s Kogan said.
To contact the reporter on this story: Ben Bain in Mexico City at email@example.com