Foreigners Cannot Get Enough Bonds in Oil-Law Boon
Comment of the Day

July 18 2014

Commentary by Eoin Treacy

Foreigners Cannot Get Enough Bonds in Oil-Law Boon

This article by Ben Bain and Isabella Cota for Bloomberg may be of interest to subscribers. Here is a section: 

International investors are boosting their holdings of Mexico’s peso-denominated government debt to a record as lawmakers near a vote on rules to end the nation’s seven-decade-old oil monopoly.

Foreigners now hold 2 trillion pesos ($154 billion) of the securities, or 37.5 percent of the total, the most recent data released by the central bank showed. Yields on Mexico’s fixed- rate bonds have fallen 0.7 percentage point this year, more than twice the average for emerging markets, according to Bank of America Corp.

Draft rules for how companies from Exxon Mobil Corp. to Royal Dutch Shell Plc can pump crude from the nation’s oil fields for the first time since 1938 were approved by Senate committees this week. Bank of America estimates ending the oil monopoly may attract $20 billion in annual foreign-direct investment.

“Foreign investors see the long-term story,” Alejandro Urbina, a money manager at Silva Capital Management LLC, which oversees $800 million including Mexico’s fixed-rate debt, said in a telephone interview from Chicago. “The process is moving forward. It didn’t stop. As long as it doesn’t get stuck anywhere, it’s positive.”

Eoin Treacy's view

Most of the news about Mexico focuses on the power of the drug cartels and the trafficking of people across the border. However this represents only a small portion of this large country’s story. The opening up of the energy sector to inward investment and the potential reversal of production declines is a more important story. 

By way of comparison Mexico’s CDS spread has been trading between 100 and 150 basis points for the last few years while Spain’s is only now returning to those levels despite the substantial contraction already posted. 

The MEXBOL Index is closing in on its 2013 peak and while some consolidation in the region of 45,000 is a possibility, a sustained move below the 200-day MA, currently near 41,500 would be required to question medium-term scope for additional upside. 


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