Emerging-Market Exodus Undermining Debt Sales in MexicoJonathan Levin
Even with Wall Street’s help, Mexico is struggling to lure investors to its local-currency bonds as speculation the Federal Reserve will curb stimulus sparks an exodus from emerging markets.
Mexico’s sale of 25 billion pesos ($1.9 billion) of five-year notes last week attracted the weakest demand since the government started using a group of banks in 2010 to help handle sales of new benchmark bonds. The bid-to-cover ratio, a measure of investor demand, was 1.02 times for the offering, which included participation by firms including Grupo Financiero BBVA Bancomer SA, Deutsche Bank AG and Barclays Plc, according to two people with direct knowledge of the transaction who asked not to be identified because they aren’t authorized to speak publicly.
Investors have yanked $44 billion from emerging-market bond and stock funds since the end of May, according to data provider EPFR Global, on concern the Fed will reduce its $85 billion of monthly bond purchases as soon as this month. Yields on Mexican notes jumped 0.1 percentage point last week, five times the average in emerging markets, data compiled by Bank of America Corp. show.
“The context was extremely complicated, the mood around the world,” Roberto Ivan Garcia Castellanos, a bond trader at Casa de Bolsa Finamex SAB, which participated in the sale, said by telephone from Guadalajara, Mexico. “It was among the worst timing possible, in the middle of the selloff.”
Brandon Ashcraft, a Barclays spokesman, didn’t respond to a phone call and e-mail seeking comment on demand for the sale, nor did Deutsche Bank’s press office nor Rodolfo Benitez, a spokesman for BBVA Bancomer.
“That particular day was a bit complicated,” Alejandro Diaz de Leon, Mexico’s head of public debt, said in a telephone interview. “We noticed that particularly in a few foreign intermediaries. In general, with respect to previous syndicated sales, there was lower demand on the part of foreigners.”
He said a sale of 9 billion pesos of three-year bonds one day earlier, which was carried out under the weekly auction plan instead of the syndicate, was evidence that there still isn’t a widespread weakening of demand for Mexican securities. Market makers exercised an overallotment option on that sale to buy an additional 2.25 billion pesos of bonds on top of the original amount, according to Diaz de Leon.
The peso climbed 0.4 percent at 3:34 p.m. in Mexico City after plunging last month the most among major Latin American dollar counterparts, eroding dollar-based returns on local-currency government bonds. Mexican bonds lost 4.5 percent in August in dollar terms, according to Bank of America.
Foreign investors’ holdings of fixed-rated peso bonds have dropped to 57 percent from 58 percent in early May, a 13-year high, according to the central bank.
Guillermo Rodriguez, who helps oversee $6 billion in assets at Corp. Actinver SAB, said speculation the U.S. may attack Syria also crimped investor demand.
“There’s a lot of risk aversion,” Rodriguez said in a telephone interview from Mexico City. “People would rather wait and see what happens” with interest rates.
Carlos Fritsch, strategist and president of Prognosis, Economia, Finanzas e Inversiones SC, a Mexican economic research company, said appetite for Mexican bonds will increase as President Enrique Pena Nieto pushes through oil reforms that boost growth and spark ratings upgrades.
“Our base scenario is that there will be a reform,” Fritsch said. “If that happens, you have a relatively rosy scenario for Mexico.”
Finamex’s Garcia Castellanos said concern Pena Nieto may encounter opposition to his bid to end the country’s 75-year oil monopoly is also reducing demand for Mexican bonds.
Opposition politician Andres Manuel Lopez Obrador, who was the runner-up for the presidency in last year’s elections, has called for supporters to rally in the capital this month.
“We thought the political road was going to be easier,” Garcia Castellanos said. “We thought everything was pre-arranged, but now we’re seeing that it’s not going to be that easy.”
The extra yield investors demand to own Mexican government dollar bonds instead of Treasuries fell two basis points today to 220 basis points, or 2.2 percentage points, according to JPMorgan Chase & Co.’s EMBI Global Diversified index.
Mexico’s five-year credit default swaps, contracts that protect holders of the nation’s debt from non-payment, were little changed at 132 basis points today, according to data compiled by Bloomberg.