How To Invest In Mexico
Mexico’s 10 Year Government Bond Yield (%)
The government bond market in Mexico is very deep for investors looking to invest in either peso or USD denominated bonds. Often providing a yield pick-up to the U.S. bonds of over 3%, foreign demand for bonds remain high. The caveat is the same as with equities; in one week in early May the peso lost 3% against the dollar, all but erasing the extra yield that Mexican bonds offer. As is the case with many emerging markets, decisions regarding positions in Mexico local-currency fixed income are probably better left to specialist, active investors who can selectively hedge the currency when necessary.
Positions in US dollar-denominated Mexico bonds are relatively less volatile, carry no currency risk, and offer a premium to US government yields of about 1.7% or 170 basis points (using 5 year credit default swaps as an example). Investors can access exposure to these bonds through a wide variety of EM bond funds – but need to pay attention whether the fund focuses on local or USD denominated debt.
In sum, Mexico’s equity market has had a great run for a few years. Whether this trend continues is more dependent on what happens in the U.S. and Brazil than what happens at home. The currency is likely to follow general EM sentiment, and local interest rates will be susceptible to U.S. interest rate policy and global risk appetite. Of the main asset classes, dollar denominated bonds are likely the best risk/reward for the uninitiated EM investor.
