Pemex Leads Record Floating-Rate Bond Offerings on Outlook: Mexico Credit

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  • Posted on April 15, 2011

    Mexican companies are selling a record amount of floating-rate debt as speculation that the central bank will raise borrowing costs this year erodes investor demand for fixed-rate securities.

    Petroleos Mexicanos, Banco Santander SA’s local unit, and billionaire Carlos Slim’s Banco Inbursa SA helped push sales of bonds tied to the interbank rate to 54.3 billion pesos ($4.6 billion) this year, according to data compiled by Bloomberg. Floating notes have accounted for 83 percent of all debt sold in the Mexican local market this year, the most since 2005. In the U.S., variable-rate bonds have accounted for 18 percent of sales.

    While inflation slowed to a five-year low of 3.04 percent in Latin America’s second-biggest economy, traders predict that the central bank will increase the key rate as soon as September to prevent a two-year-old expansion from fueling faster price increases. Mexico is the only major Latin American country that hasn’t raised interest rates in the past year.

    “The premium that a fixed rate can give you doesn’t compensate for the risk that you’ll take that rates will increase,” Guillermo Rodriguez, who helps manage $5.5 billion of assets as director of investments with Corp. Actinver SAB, said in a telephone interview from Mexico City. Actinver funds have more than 90 percent of their bond holdings in floating- rate securities, he said.

    Central bankers led by Governor Agustin Carstens will keep the benchmark rate at a record low 4.5 percent at a policy meeting today, according to a Bloomberg survey of 14 economists.

    Grupo Herdez

    The 28-day interbank rate, the benchmark for variable-rate bonds, has fallen 1.5 basis points, or 0.015 percentage point, this year to 4.86 percent. The average fixed-rate local corporate debt climbed 110 basis points during the same period to 7.73 percent, according to data compiled by Bloomberg. The average government fixed-rate bond yield rose 24 basis points to 6.78 percent, according to Bank of America Corp.

    Grupo Herdez SAB, a Mexican producer of canned and bottled food products, sold 600 million pesos of bonds maturing in 2014 to yield 60 basis points over the interbank rate, known as TIIE, on Feb. 16. The Mexico City-based company paid a fixed rate of 7.93 percent in September for 600 million pesos of notes due in 2017.

    “There’s a big difference between the floating rate and the fixed rate,” Gerardo Canavati, director of planning and chief financial officer for Grupo Herdez, said in a telephone interview. “You have to think about it in terms of: How much does my fixed rate cost, and how much does my floating rate cost? And try to determine the middle ground.”

    ‘Comfortable’ With Policy

    Mexico’s March inflation slowed to half the 6.3 percent rate in Brazil, the region’s biggest economy.

    Growing sales of floating-rate debt shows that Mexican companies “are comfortable with Mexico’s current monetary policy and see a less inflationary environment,” said Enrique Alvarez, head of Latin America fixed-income research at IDEAGlobal in New York.

    Petroleos Mexicanos, the state-owned oil producer, sold 10 billion pesos ($833.7 million) of five-year bonds to yield 21 basis points over TIIE last month.

    Officials at Pemex, as the Mexico City-based company is known, Inbursa and Banco Santander’s local unit didn’t immediately respond to e-mails and phone calls requesting comment.

    The peso gained 0.5 percent to 11.7125 per U.S. dollar yesterday.

    The extra yield investors demand to own Mexican government dollar bonds instead of U.S. Treasuries narrowed five basis points to 125, according to JPMorgan Chase & Co.

    Rate Futures

    The cost to protect Mexican debt against non-payment for five years rose two basis points to 100, according to CMA. Credit-default swaps pay the buyer face value in exchange for the underlying securities or cash equivalent if the issuer fails to comply with debt agreements.

    Yields on the interbank rate futures contract due in September rose one basis point to 5.05 percent, indicating traders expect a rate increase that month. As recently as April 11, they predicted that the central bank would raise borrowing costs in August. In the past five years, the gap between the 28- day TIIE and the overnight rate has averaged 36 basis points.

    Investors are wrong to predict rate increases this year because inflation will remain in check, said Alberto Bernal, head of fixed-income research for Miami-based Bulltick Capital Markets. He predicts that Banco de Mexico will start lifting rates in January.

    ‘Negative Shocks’

    Mexico’s yield curve “is pricing in negative shocks on inflation, deterioration of credit quality, or very strong growth, and I honestly don’t think that any of those are going to materialize,” Bernal said in a telephone interview. “Growth is going to be OK. And I don’t expect an inflation shock.”

    The central bank’s five-member board has kept the benchmark lending rate at 4.5 percent for a record 17 meetings after cutting it 375 basis points in 2008 and 2009 to revive growth amid the global financial crisis. Gross domestic product shrank 6.1 percent in 2009 after the U.S., the biggest buyer of Mexican exports, slipped into recession.

    The economy grew 5.5 percent last year, the most in a decade, as a rebound in the U.S. pushed exports to a record $298 billion. Finance Minister Ernesto Cordero said last month the economy may expand as much as 5 percent this year, more than a previous estimate of 4 percent.

    “If you look at recent years, rates have come down, and right now we’re at the bottom of the cycle,” Rodriguez said. “The cycle is shifting and so the expectation is that rates will increase.”

    To contact the reporters on this story: Andres R. Martinez in Mexico City at; Jonathan J. Levin in Mexico City at

    To contact the editor responsible for this story: David Papadopoulos at


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