Economy & Business - June 2011 (ISSN 1741-7430)

Foreign investors are scurrying to buy Mexican debt, attracted by high real returns as Mexican inflation falls to its lowest rate for five years. It is worth noting, however, that five year credit default swaps for Mexican debt stand at 115 basis points, exactly the same as Brazil. Mexican bonds have jumped to their highest level in 10 months on the assumption that slowing inflation will allow the central bank to keep interest rates at a record low levels. Mexico, alone of the major Latin American economies, has not raised interest rates this year.
The local peso has risen by about 11% against the US dollar this year, giving foreign investors in Mexican bonds pretty luscious returns. The problem is that the fundamentals of the Mexican economy are pretty dismal (rising unemployment, faltering consumer confidence, possible balance of payments problems) and the country is facing general elections in July 2012.
The extra yield investors demand to hold Mexican government dollar bonds instead of US Treasuries stood at about 150 basis points on 24 June. Brazil's spread over Treasuries is significantly higher, because its Real debt currently yields about 12.4%.

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