Oil Selloff Sours BlackRock’s Bond Favorite in Mexico

Mexico’s local-currency bonds, which captivated BlackRock Inc. and Pacific Investment Management Co. earlier this year, are falling with the peso as a selloff in oil and political turmoil dim prospects for foreign investment.

The peso-denominated debt has lost 6.9 percent in dollar terms since the end of June, versus a 0.2 percent loss for developing nations, according to data compiled by Bloomberg. That’s a reversal from the first half of the year, when the notes rose 8 percent. Mexico’s currency fell to the lowest since 2012 this week after oil prices sank to a five-year low.

Investors who bought peso bonds to profit from the end of Mexico’s 76-year oil monopoly are now contending with the prospect that the slump in crude prices will curb interest in foreign investment in the industry, said David Rees, an emerging-market economist at Capital Economics Ltd. The nation’s assets may also lose some of their appeal in the wake of protests following the disappearance of 43 students and a growing controversy involving property owned by President Enrique Pena Nieto’s wife, he said.

“There were high expectations around the performance of Mexico at the start of the year, and now it’s just been one thing after another,” Rees said in a telephone interview from London. With “this oil stuff, corruption and security concerns, basically the appetite for the Mexican story has waned.”

Oil Blocks

Falling crude prices are likely to deter investments next year when the world’s ninth-biggest producer of the commodity holds its first auction of oil blocks to outside bidders since 1938, Rees said. The Energy Ministry projected in August that the oil law changes would add an average $12.6 billion a year to foreign investment from 2015 through 2018.

While Mexico sold a record amount of debt this year, capitalizing on global demand, the nation’s bonds have fallen along with oil. Crude fell to a five-year low on Nov. 28 and is trading below $70 a barrel after the Organization of Petroleum Exporting Countries left output targets unchanged amid a glut.

Peso bonds due 2024 have slumped 3 percent from this year’s high in June. Over the past month, the peso has lost 4.2 percent, the most among the world’s 16 major currencies tracked by Bloomberg after Japan’s yen. Mexico’s currency fell 1.8 percent to 14.4152 per dollar at 3:35 p.m. in New York.

President’s Approval

In addition to the oil slump, Pena Nieto’s approval dropped to the lowest level since he took office two years ago. His popularity has fallen in part after 43 trainee teachers disappeared more than two months ago in a case that has become a symbol of the country’s perceived lawlessness.

His wife, Angelica Rivera, is also planning to sell her rights to a house that was held under the name of a contractor that won part of a $4.3 billion Mexican high-speed rail award, which was subsequently canceled. On the economic front, the Finance Ministry and central bank cut their 2014 growth forecast ranges last month after Mexico’s expansion missed analysts’ estimates for the eighth time in 10 quarters.

Eduardo Sanchez, a spokesman for the Pena Nieto administration, didn’t respond to a phone call and an e-mail. The Finance Ministry did not respond to comment on the impact of the decline in oil and the peso on the economy.

Investors have been concentrating more on the “noise around some of the domestic issues,” Vivienne Taberer, who helps manage $14 billion in fixed-income assets at Investec Asset Management, said by telephone from Cape Town.

Biggest Holder

BlackRock, the world’s largest money manager, is the biggest holder of benchmark peso bonds due 2024, while Pimco is the third-biggest, data compiled by Bloomberg show.

Melissa Garville, a spokeswoman for New York-based BlackRock, declined to comment on the firm’s Mexican holdings while Mark Porterfield, a spokesman for Newport Beach, California-based Pimco, didn’t reply to e-mails seeking comment.

Investors pulled $402 million from Mexican bonds in the three month-period ending Nov. 30, trimming this year’s net inflows to $359 million, according to data on funds tracked by EPFR Global, a Cambridge, Massachusetts-based research company.

“Mexico is being hit from all fronts,” Luis Maizel, who helps manage $5.5 billion of fixed-income securities at San Diego-based LM Capital Group LLC, said in a telephone interview. “It’s getting hit as an emerging market, as an oil-producer, and by its political concerns.”

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