One-Hundred-Year Bond Swoon Explains Fed’s Sway in Mexico

Holders of Mexico’s 100-year bonds, who have been among the biggest beneficiaries of the Federal Reserve’s easy-money policies, are realizing just how painful the prospect of higher U.S. interest rates can be.

The bonds due 2110, the world’s longest-dated dollar-denominated government debt, have lost 8.8 percent since early February on speculation a strengthening U.S. labor market will enable the Fed to end its six-year-long policy of holding benchmark rates close to zero. The loss is more than four times the average for developing-nation debt in the same span.

Investors snapped up the so-called century bonds, which were sold to yield 6.1 percent in October 2010, as steps by central banks globally to suppress borrowing costs increased demand for assets that offered higher returns. While the deal helped Mexico to lengthen maturities on its obligations, it left buyers more vulnerable to losses than shorter-dated securities as the market began pricing in higher rates.

“You have to sell your century bond” if you think the Fed is going to tighten, said Alberto Bernal, the head of research at Bulltick Capital Markets in Miami.

The bonds returned 22 percent in 2014, double the average for emerging-market sovereign bonds. And, in a reminder of how volatile the longest-dated securities can be, they plummeted 21 percent in 2013, when the “taper tantrum” triggered by the Fed’s comments on monetary policy caused debt securities to tumble around the world.

Fed Patience

Based on the century bonds’ sensitivity to interest rates, they would lose about 10 percent over the next year if yields rose by 1 percentage point. That’s almost three times the projected loss over the same period on Mexico’s 10-year bonds.

Mexico is the only country that’s sold century bonds in two different currencies. Last year, it sold 1 billion pounds of bonds maturing in 2114. China and the central bank of the Philippines sold $100 million of century bonds in 1996 and 1997, respectively. Countries including the U.K. and the Netherlands issue perpetual bonds that don’t mature.

Before tumbling, Mexico’s 2110 bonds climbed to a 20-month high of 115 cents on the dollar on Feb. 2.

Finance Ministry press officials didn’t immediately respond to a request for comment.

While the Fed has said it would be “patient” on increasing rates, economists in a Bloomberg survey predict rates will climb to at least 0.75 percent by March 2016, from the current range of zero to 0.25 percent.

Mexico’s peso dropped 0.8 percent to 15.5109 per U.S. dollar at 3:04 p.m. in New York.

There are currently about $2.7 billion of the 2110 bonds outstanding, since Mexico sold more of them in 2011 and 2012.

‘Two Sides’

The issuance of such long-dated bonds is part of an effort by the government to strengthen its creditworthiness by pushing out the average due date on its debt. Since the end of 2009, the weighted average maturity of its bonds has increased to 20.12 years from 12.61 years, data compiled by Bloomberg show.

“This is a risk the issuer hands over to the investor,” said Gerardo Rodriguez, who was head of the finance ministry’s public debt unit when Mexico sold its 100-year dollar bonds in 2010 and is now a senior investment strategist at BlackRock Inc., which oversees $200 billion in emerging-market funds. “There’s definitely two sides of this coin, and there are scenarios in which you will do great and others in which in you won’t.”

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