By Paul Kilby
NEW YORK, Aug 1 (IFR) - Mexico has room to tap the
international bond markets one more time this year should
opportunities arise, according to the country's head of public
So far this year, Mexico has raised about US$4bn through
debt issuance in dollars, euros and most recently in yen. The
sovereign came to Japan this week with a US$875m equivalent
multi-tranche Samurai that further consolidated its presence in
"Last year we did about US$5bn," Alejandro Diaz de Leon told
IFR. "This time around we are a bit below that number. We have
some space to do something else if there is an appropriately
attractive window. We will keep our eyes open if in the second
half potentially attractive opportunities could materialize."
The sovereign consistently entertains a variety of funding
options, but given the limited amount it raises in the external
markets each year, it tends to focus on its core currencies,
namely dollars, euros and yen.
"For us there is additional value in consolidating our
benchmarks to add liquidity to the three key markets," said Diaz
Mexico kicked off the year with a US$1.5bn tap of its 4.75%
2044s via Barclays and JPMorgan, reopening that bond in early
January at 109.615 to yield 4.19%, or Treasuries plus 110bp.
It then returned to the euro market in April after a hiatus
of more than two years, creating its largest benchmark in the
sector - a 1.6bn euros 10-year - with the help of an intraday
liability management operation to mop up illiquid bonds.
After this week's yen trade -- which helped Mexico assert
its presence in Japan and further diversify its investor base --
it appears that the dollar market may be the next target.
"In the euro market the liability management has already
been done, and going forward we will keep an eye on how our
dollar yield curve behaves," Diaz de Leon said. "We will
evaluate if there is a transaction or liability management
exercise that could be useful."
What exactly the sovereign might do in the dollar market is
still a matter for debate, but creating a new 10-year benchmark
is long overdue now that the 3.625% 2022s are looking a bit long
in the tooth.
A long 10-year due 2024 would probably make sense as Mexico
has few maturities that year, with the exception of 447m pounds
in outstanding 6.75% notes.
Along that part of the curve, possible buyback or exchange
targets include US$714m in outstanding 8% 2022s and US$339m of
With those bonds trading at high dollar prices of 131.50 and
168.00 respectively, investors in theory would be willing to
swap them into a new bond priced closer to par, though holders
of the 2026s may be reluctant sellers given the high coupon.
Nonetheless, the days of locking in historically tight rates
may be gone forever despite UMS's relative outperformance during
the recent sell-off. On a new 10-year at least, it seems
unlikely that it would achieve the 3.625% coupon on the existing
When that bond was issued in late 2012, it marked the
country's smallest coupon ever along that part of the curve. It
was trading yesterday at a G-spread of 135bp, or a yield of
3.69%. That's considerably wider than the 2.54%, or 70bp
T-spread, seen in January before US yields spiked on fears of
"There is no way the UMS could do a 10-year at 3 5/8s," said
a DCM banker. "Treasuries would have to rally by 10bp and they
would have to issue with no new issue premium."
A long-end trade is certainly out of the question. Not only
would it be comparatively expensive - the 2044s are now trading
at a 5.36% yield, or G spread of 171bp - but at a 90.9 dollar
price the instrument is well below OID thresholds.
Indeed, the government has already responded to a steepening
yield curve by cutting the amount of longer-dated, fixed-rate
bonds it issues in the local market. The implications are that
it will do the same in the external market.
"Going forward we are likely to see a yield curve in the US
whose steepness will reflect the stronger recovery and that will
translate into other yield curves linked to the dollar," said
Diaz de Leon.
"At the end of the day if the yield curve steepens it is
more expensive to issue a larger size with a longer-dated