Mexico sold nearly $3bn of debt on Monday at record low rates, as emerging market portfolio managers seek to put billions of dollars that have flowed into the asset class to work.
Orders for the two-part US dollar bond deal surpassed $9bn as Mexico readied to refinance debts coming due early next year with lower cost paper, according to four people familiar with sale.
Appetising yields on emerging market debt have proven a hook for investors searching out income in a world with nearly $13tn of debt trading with a yield below zero.
More than $16bn has flowed to mutual funds and exchange traded funds invested in emerging market debt since Britain voted to leave the EU in June, as investors prepare for central bank stimulus that is expected to suppress rates across developed markets.
“The theme has been this global hunt for yield with rates at close to all-time lows,” said Sean Newman, a portfolio manager with Invesco. “Sovereigns and corporates will find it attractive to . . . retire older debt with cheaper debt.”
The sale on Monday included $760m of 10-year debt priced with a yield of roughly 3.04 per cent — 145 basis points above the benchmark US Treasury. Those bonds will mature alongside $3bn of decade-long debt Mexico issued in January that at one point this year had weakened to trade with a yield 256 basis points above the 10-year Treasury. Yields rise as bond prices fall.
People familiar with the sale said the new 10-year debt priced two basis points above the country’s existing yield curve, underscoring the intense demand for a piece of the transaction.
The country also tapped strong appetite for new 30-year paper. Underwriters, led by BBVA, Bank of America Merrill Lynch and Credit Suisse, sold 30-year debt with a yield 205 basis points above similarly maturing Treasuries — or at 4.37 per cent. The final pricing was 20 basis points tighter than the yield marketed to portfolio managers earlier in the day.
Mexico follows in the foot steps of Trinidad and Tobago, Ecuador and Brazil, which have all issued new debt over the past month as emerging market borrowing costs have slid. Mexican dollar bonds have advanced 14 per cent since the year began, outpacing the 9 per cent return for the Barclays global aggregate index.
“Demand for this deal is reflective of broader emerging market sentiment,” said Valerie Ho, a portfolio manager at asset manager DoubleLine. “People are in a search for yield and they have money to put to work.”
The country’s Treasury said more than 250 institutional investors participated in the sale and confirmed that it had never sold 30-year bonds with a lower coupon. One person familiar with the deal added that several large Asian insurance companies participated in the offering, buyers who until recently were not typical investors in emerging market debt. US investment grade and emerging market accounts were also principal participants in the sale.
“There are big investment grade pockets of money, Asian money coming to emerging markets and bets from index buyers who six months ago would not have touched Latin America out of fears of contagion, oil and China,” said Maxim Volkov, head of Latin America debt origination at Bank of America.
Analysts with Moody’s, who rate the Mexican federal government six notches below its top AAA opinion, said that the country was “relatively well positioned to manage external financial shocks on account of relatively robust reserves”. They noted, however, that lacklustre global growth remained a weight on Mexico and posed “continued policy challenges”.
A whipsawing peso has also been a concern for the government and the Bank of Mexico, with the currency down 7.8 per cent for the year. That has weighed on local-currency sovereign debt, which has returned minus 4.2 per cent this year in contrast to the gains in the country’s hard-currency bonds.
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