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 Business News | July 2005 
Investor Confidence Gets Boost
 Todd Zeranski - Bloomberg News
| | High oil prices have given financial firms a reason to be optimistic about Mexico. |
Mexico's U.S. dollar-denominated bonds may extend a 3 1/2 month rally as the country benefits from record oil prices and improving credit quality.
"We're more optimistic on Mexico relative to the market as a whole," said Christian Stracke, an emerging-market debt strategist at New York-based CreditSights Inc. "The emerging-markets sector as a whole is overbought and we've seen it starting to pull back a bit. As the market pulls back, safer credits like Mexico tend to outperform."
Record oil prices helped Mexico, the world's fifth-largest oil producer, boost international reserves by 16 percent in the past two years to US62 billion. Higher reserves and President Vicente Fox's efforts to pay down dollar debt led Moody's Investors Service in January to raise the country's foreign-currency debt rating to Baa1, the third-lowest investment grade. Standard & Poor's also rates Mexico investment grade at BBB.
The nation's debt carried junk ratings just five years ago.
Dollar-denominated bonds sold by Mexico had the highest return among major emerging markets after Russia and Poland in the first half, according to Merrill Lynch & Co.'s Global Sovereign Indices. Mexican dollar bonds returned 5.3 percent in the period, including reinvested interest, Merrill Lynch said.
Mexico's 6 5/8 percent bond of March 2015 fell 2 basis points in yield, or 0.02 percent, to 5.49 percent and its price rose to US108.38 from US108.23, according to Bloomberg data. The yield on the benchmark 10-year U.S. Treasury fell 6 basis points to 4.22 percent, according to Cantor Fitzgerald LP.
Yields, Spreads Decline
The Mexican bond's yield has declined from this year's high of 6.33 percent in late March, and the margin of 1.25 percentage points over Treasury yields has narrowed from 1.8 percentage points. By comparison, a Brazilian 10-year dollar-denominated bond yields almost 8 percent.
Smaller yield margins, or spreads, mean investors are more confident of Mexico's ability to repay debt and are willing to accept less extra yield to compensate them for the risk of owning Mexican debt rather than Treasuries, which are considered to have no default risk.
"Solid macroeconomic fundamentals, improving external debt dynamics and solid international reserve positions," are reasons to hold Mexican bonds, said Mohamed El-Erian, who oversees the world's biggest emerging market debt fund at Pacific Investment Management Co. in Newport Beach, California said in an email.
Debt Reduction
Under Fox, who took office in 2000, Mexico reduced international debt to 10 percent of gross domestic product, the lowest in at least 32 years, from 13 percent by replacing it with peso debt. The government last week used pesos to buy US2.88 billion of central bank international reserves, helping further reduce foreign debt.
The dollar purchases, combined with proceeds from bond sales in the past nine months, are enough to cover all foreign debt maturities through the end of 2007, the Finance Ministry said last week in a statement.
Mexico pumps 3.82 million barrels daily, according to BP Plc. Oil has risen 47 percent this year. Taxes paid by state oil monopoly, PeMex, account for about one-third of federal revenue. |
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