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Mexico's 100-year bond bonanza shows panic fading

MEXICO CITY – Investors who missed a windfall from Mexico’s 100-year bonds still have a chance to profit.

The country’s $2.68 billion of debt due 2110 has returned 15 percent this year, more than twice the emerging-market average and topping the 12 percent gain in 30-year Treasuries, data compiled by Bloomberg and Bank of America show.

The rally in Mexico’s bonds, part of a surge in longer-dated debt globally, isn’t over as U.S. policy makers say near-zero rates will remain for a “considerable time” after debt purchases end, according to Prudential Financial Inc. and Bank of Nova Scotia. Mexico, the only country in the world to issue two so-called century bonds, saw its dollar notes’ price plunge 23 percent last year on concern the Federal Reserve’s tapering would spark a surge in yields.

“There was a gigantic fear factor, and the longer the duration, the more there was,” David Bessey, a money manager at Prudential Financial who helps oversee $28 billion in emerging-market assets, said by phone from Newark, New Jersey. “What we’ve seen in 2014 has sort of been a little of a reversal of that fear.”

Filings data compiled by Bloomberg show that Prudential holds Mexico’s century bonds. Mexico’s 100-year bonds have surged 11.4 cents to 103.79 cents on the dollar this year, with yields touching an 11-month low of 5.49 percent last week, data compiled by Bloomberg show.

Mexico’s peso was little changed at 12.9063 per U.S. dollar at 7:01 a.m. in New York.

In a note to clients dated May 9, Bank of Nova Scotia recommended investors buy the bonds. The yields may fall an additional 0.16 percentage point in the next two months, according to Joe Kogan, Bank of Nova Scotia’s chief emerging-market strategist.

“For the last year everyone has been saying yields should rise on Treasuries and that’s what people have been expecting,” Kogan said by telephone from New York. “What’s happened with U.S. Treasuries in the past month supports the investment hypothesis for the 100-year bonds.”

Yields on 30-year Treasuries have dropped 0.14 percentage point to 3.38 percent in the past month.

In March, Fed Chair Janet Yellen said economic conditions may “warrant keeping the target federal funds rate below levels the committee views as normal in the longer run.” The Fed has reduced monthly debt purchases by $10 billion at each of its past four meetings from $85 billion last year.

Jeremy Brewin, who helps oversee about $7.3 billion of bonds as the head of emerging-market debt at ING Investment Management in The Hague, said he’s shunning Mexico’s century bonds as gains are likely to slow.

“I’d suggest pausing and not following the exuberance of the market,” Brewin said by telephone.

Ninety percent of economists surveyed by Bloomberg predict that European Central Bank President Mario Draghi will ease monetary policy next month. He said last month that any worsening of the medium-term inflation outlook would warrant broad-based asset purchases.

In March, Mexico sold 1 billion pounds ($1.68 billion) of bonds that mature in 2114 at 97.834 pence on the pound to yield 5.75 percent. The securities’ price has increased to 99.03 pence on the pound, with yields falling to 5.68 percent, according to data compiled by Bloomberg.

“There’s been this really strong demand for long-dated assets this year,” Prudential’s Bessey said by phone. “If we had lots of other 100-year instruments in different emerging- market countries, we can hypothesize that this probably would have happened with them as well, but Mexico is kind of the only one that really has them.”

© 2014, Bloomberg News

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