One-Hundred-Year Bond Plummet Shows Taper Concern: Mexico CreditBen Bain
Mexico’s 100-year bonds are on the verge of losing all their gains over the past two years as speculation the Federal Reserve will curb stimulus overshadows the nation’s biggest economic reforms in almost two decades.
The $2.7 billion of dollar-denominated debt due in 2110 has tumbled 29.1 cents to 91.24 cents on the dollar this year, after climbing 32.3 cents from 2010 to 2012, according to data compiled by Bloomberg. The notes have lost 19.4 percent in 2013, exceeding the 12.7 percent average drop for emerging-market sovereign bonds due in 10 years or more, according to data compiled by Bloomberg.
While Mexico may pass legislation to break the country’s 75-year-old state oil monopoly this month, its 100-year debt is proving more susceptible to concern the Fed will curb its bond-buying program as soon as next week because an increase in yields cuts more value from longer-dated notes. The 120-day correlation coefficient between 30-year Treasuries, the longest-dated U.S. notes, and the 100-year bond reached a record 0.63 yesterday. A reading of 1 means the securities always move in lockstep.
Mexico “could be a relatively good place to be country-wise and this could be a terrible place to be simply because it’s an ultra-long duration instrument,” Michael Shaoul, the chief executive officer of Marketfield Asset Management LLC, which oversees about $17 billion, said by phone from New York. “The further you go out in duration the more just the general direction of interest rates matters.”
Modified duration, which measures a bond’s sensitivity to rate changes, was 15.87 for Mexico’s 100-year notes, compared with 13.27 for Brazil’s 2041 debt, the longest-dated securities from the South American country.
Yields on the so-called century bonds have surged 1.53 percentage points this year to 6.3 percent, according to data compiled by Bloomberg. Those on the U.S. 30-year note have risen 0.89 percentage point to 3.84 percent in the same period.
Amid signs of an improving U.S. labor market, the Fed may start scaling back its $85 billion in monthly bond purchases at its Dec. 17-18 meeting rather than wait until January or March, according to 34 percent of economists in a Dec. 6 survey by Bloomberg. In a poll last month, just 17 percent of economists predicted a December tapering.
The slump in century bonds “has to do with the fear of taper that is present in the market,” David Bessey, a money manager who helps oversee $26 billion at Prudential Financial Inc., said in an e-mailed response to questions. “That is overshadowing the reform optimism.”
The peso weakened 0.6 percent to 12.9439 per dollar at 10:20 a.m. in Mexico City.
Mexico lawmakers from Pena Nieto’s ruling Institutional Revolutionary Party, or PRI, and the largest opposition party, known as the National Action Party or PAN, are pushing a joint bill through Congress to allow output sharing and licenses for outside companies and to lure investments from Exxon Mobil Corp. to Chevron Corp.
The Senate last night approved in general terms the bill that supporters say will make Mexico, currently the world’s ninth-largest oil producer, the fifth largest in about a decade.
The government estimates an energy-industry revamp would lift growth by 1 percentage point by 2018.
Alberto Bernal, head of fixed-income research at Bulltick Capital Markets, said the declines in century bonds will end next year as U.S. monetary policy becomes clearer.
“Anything that has to do with Mexico should continue to be very well received because the prospects are looking much better,” Bernal said by telephone from Miami.
Mexico initially sold the century bond in October 2010 and issued more of the securities in follow-up offerings in August 2011 and August 2012, according to data compiled by Bloomberg.
“A hundred years is a really, really long time,” Marketfield Asset Management’s Shaoul said. “It’s going to trade off global interest rates.”