Mexican and Argentinean government bonds are finding some favour with fund managers as economic reco...
Mexican and Argentinean government bonds are finding some favour with fund managers as economic recovery follows the financial problems of the past year.
Mexico is seen by many as one of the strongest economies among the emerging markets with one of the more stable currencies in the sector. It is viewed as a relative safe haven among emerging markets as its growth is being fuelled by the success of the US economy.
Those investing in emerging market bonds tend to follow
the JP Morgan Emerging Markets Bond Index, which is dominated by Latin America - making up 80% of the index.
There is also a view among some bond investors that the emerging debt markets are a less risky place to be than they have been in recent months because these economies are starting to recover. As exports have increased, imports have been reduced and currencies have stabilised in many of the emerging markets. Interest rates are starting to fall and a virtuous cycle is developing with an improvement of creditworthiness in many these markets.
David Cryer, director of fixed interest at Clerical Medical, says the group has some exposure
to Mexico. Clerical Medical bought into 10- and 30-year Mexican government bonds earlier this year believing that spreads against US Treasuries were too high and likely to narrow.
The spread available on Mexican government debt over US Treasuries was running at around 450 basis points earlier this year, but has since narrowed to around 440 basis points. The yield on 10-year US Treasuries is 5.83% while the yield on 30-year US Treasuries is 6%.
Cryer says: "We have bought into Latin America and we hold some Mexican bonds as well as a short position in Argentina. These are not core holdings
but we believe that there are
still short-term opportunities particularly if the market gets oversold. We are looking at these as opportunistic investments.
"Mexico tends to be one of the stronger countries among the emerging markets and also one of the most stable emerging markets currencies.
"Our position in Argentina is particularly short - there is a yield of around 10.5% to maturity in 2001 and the issue is sterling denominated, but on the whole you only play these markets in dollars. That is where the liquidity is since there is not as much in sterling. Our position on Mexico is that there is potential for the spreads to tighten to 400 or 350 basis points. We believe that these are going to outperform the equivalent US Treasuries and we expect the yields to tighten probably over the next three to six months."
Others remain cautious of having emerging market debt exposure after the financial crisis of last year which badly hit many of these countries' currencies and bond markets.
Alan Wilde, head of fixed interest at Scottish Mutual, says: "We have bought some sterling denominated debt for sovereign issues and have from time to time held issues from the likes of Mexico, Brazil and Colombia. We are not active players in this market."
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