(Bloomberg) -- Mexico’s pension funds are selling government bonds as they prepare for faster inflation, clashing with foreign investors such as Pacific Investment Management Co. who have bought the debt to profit from an oil-led growth boom.
The peso-denominated fixed-rate bonds, known as Mbonos, accounted for 17 percent of pension holdings as of November, the least since at least 2008 and less than 19.6 percent a year earlier, according to regulatory data. Pensions now hold 14 percent of the debt, versus 57 percent for foreigners, according to data from the central bank.
Pension funds with a combined $157 billion in assets are pulling out of sovereign debt even as lawmakers approved a bill backed by President Enrique Pena Nieto to open the country’s energy industry to more private investment, prompting a ratings upgrade from Standard & Poor’s this month. While the reforms may unleash growth, the government also is instituting new taxes that may stoke consumer price increases early next year, according to Grupo Financiero Banorte SAB.
“They’re probably trying to adapt a much more defensive strategy considering the possible pickup in inflation,” Alejandro Padilla, a strategist with Banorte, said in a telephone interview from Mexico City. Mexico’s inflation rate, currently at 3.6 percent, probably will increase early next year as taxes on soda pop, junk food and dog food take effect. Padilla recommends three- and five-year inflation-linked bonds.
Sugary Drinks
Inflation-linked securities known as udibonos have climbed to 21 percent of the pension funds’ portfolios, the most since December 2012 and within 1 percentage point of a record high, the data show.
Levies set to take effect Jan. 1 include a 1-peso-per-liter excise tax on sugary drinks. Congress also agreed this year to increase the sales tax to 16 percent from 11 percent in areas near the U.S. border, harmonizing with rates in the rest of the country.
Economists covering Mexico raised their 2013 inflation forecasts to 3.82 percent this month from 3.71 percent in November, according to a Dec. 10-17 survey of 38 banks and analysis companies by Mexico’s central bank.
“There’s some inflation in the pipeline for next year in terms of the fiscal reform,” Luis de la Cerda, who oversees 288 billion pesos in assets as chief investment officer of pension manager Afore Sura, said by phone from Mexico City.
Real Revolution’
Mexico passed at least 10 constitutional amendments in Pena Nieto’s first full year in office, including breaking up the state’s monopoly on oil production and increasing competition in the telecommunications industry. Former Goldman Sachs Group Inc. economist Jim O’Neill, who now writes a column for Bloomberg View, said the reforms may increase Mexico’s long-term economic growth rate to 5 percent from the current 3 percent.
Laurence D. Fink, who oversees $3.86 trillion as BlackRock Inc.’s chief executive, said Oct. 3 that Mexico is “at the beginning of a real revolution.” Melissa Garville, a spokeswoman for New York-based BlackRock, declined to comment beyond saying Fink’s views were his own and not necessarily those of the firm.
Pacific Investment Management Co., the world’s biggest bond fund manager, is the largest holder of Mexico benchmark peso- denominated bonds due in 2024, according to filings data compiled by Bloomberg.
Record Holdings
“We continue to think Mexico is a relatively attractive market, in the context of strong structural-reform momentum that may lead to a ratings upgrade,” Mike Gomez, co-head of emerging markets portfolio management at Pimco, said in an e-mailed response to questions. He cited “a steep yield curve, and nominal and real interest rates that are significantly higher than we find in the developed world.”
Foreign investors have increased their holdings of Mbonos to a record 1.2 trillion pesos ($92.6 billion) on Dec. 2, according to central bank data. The 57 percent of foreign bonds they had in their portfolios on Dec. 17 is up from 53 percent a year earlier.
The yield difference between one-year Mexican bonds and those maturing in 2042 was 4.12 percentage points on Dec. 27, compared with an average over the past year of 2.82 percentage points. Ten-year government peso bonds yield 3.49 percentage points more than U.S. Treasuries.
Currency Play’
S&P raised Mexico’s rating to BBB+ from BBB on Dec. 19 after the country’s legislature approved constitutional changes to allow private companies to drill for oil in the country for the first time in 75 years, calling the bill’s passage a “watershed moment.”
Eugenio Lopez Garza, head of the Mexico office of Fitch Ratings, which boosted Mexico to the third lowest investment grade rating of BBB+ in May, said in comments published by newspaper El Universal on Dec. 27 that faster growth was needed for an additional upgrade.
Paul McNamara, who helps manage $6.5 billion in emerging- market debt at GAM Investment in London, said that Mexican bonds are a “currency play” for most foreign investors, rather than a bet on interest rates. Mexican pension funds don’t benefit in the same way from a strengthening of the currency, since their investors are peso-based.
“I don’t think anybody is genuinely worried about inflation in Mexico,” McNamara said by phone from London.
Strong Volatility’
Afores, as the pension funds are known, are heading for the narrowest annual returns since 2008, with a 3.83 percent average gain in the twelve months through November, or 0.21 percentage point better than inflation in the period. Mbonos have had their worst year on record in data going back to 2001, with a 1 percent return in peso terms, according to a Bank of America Corp index. They gained 13 percent in 2012 and 10 percent in 2011. Dollar-based investors fared even worse, with a 0.5 percent return, because of depreciation in the peso.
Mexican bonds were roiled along with those from other emerging markets as the U.S. Federal Reserve moved to curb monetary stimulus that has driven investors to higher yielding assets from developing countries. The Fed said Dec. 18 it will reduce its monthly asset purchases to $75 billion from $85 billion.
Pensions are “trying to avoid the strong volatility we’ve seen in the financial markets in previous months,” Banorte’s Padilla said. “Interest rates are going to remain volatile.”
