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Debt party

6 October 2010 By Jeffrey Goldfarb

Investors rushed in for Mexico s $1 billion 100-year bond like kids to a busted piñata. The appetite for this rare ultra-long debt reflects enthusiasm for emerging markets, Mexico s economic turnaround and the 6.1 percent yield on offer. But the country s domestic troubles and past crises still hang in the air. Mexico s strike looks wisely timed with investors downplaying the risks.

Century bonds don t come along too often, whether from countries or companies. Among emerging economies, only China and the Philippines have tried it in recent memory. Norfolk Southern, the U.S. railroad operator, this summer sold $250 million due in 2105 with a yield of 5.95 percent. Mexico s deal, yielding nearly 1 percentage point more than its 30-year bonds, would have attracted a different set of buyers, including plenty of built-in demand from index funds and insurers.

The story would have been compelling for others too. After suffering its worst economic contraction in nearly 80 years in 2009 – a 6.5 percent GDP decline – Mexico s growth is expected to be as high as 5 percent this year. And with 10-year U.S. Treasury yields below 2.4 percent, the quest for investment returns is reminiscent of a time not long ago when AAA-rated subprime mortgage-backed bonds roamed the markets.

The comparison, though extreme, is relevant. There are plenty of risks that aren t getting much attention. Mexico is fighting a bloody war on drugs that has killed more than 29,000 people in the last four years – though that doesn t seem to have impeded foreign investment yet. Structural reforms still lag those of fast-growing Brazil and Chile. And in the context of a century-long bond, episodes of debt default and currency devaluation – each of which threatened Mexico with economic collapse – are far from ancient history.

Still, for now Mexico s debt is in demand. And the country isn t done capitalizing on the selective memories of investors. Next up is a $1.8 billion yen-denominated bond due to be sold later this month. Would-be buyers should remember that candy that seems sweet today can gum up the portfolio tomorrow.

Additional reporting by Timothy Sifert

 

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