Another interest rate record was smashed this week when the three-month Euribor – the benchmark interbank lending rate in the eurozone – went negative for the first time. Germany has negative interest rates out to nine years and markets are on watch to see if the critical German 10-year bund moves into negative yield territory. Spain, one of the southern European countries that markets thought might default on its debt just a few years ago, now has short-term debt at negative yields.
The quirky negative rate environment is producing bizarre behavior and creating opportunities as well as some chaos. It is clear that if investors in European bonds – and there are a lot of those these days – want to get any meaningful return on their money, they need to go farther out on the yield curve.
Interestingly, Mexico offered a unique solution. Earlier this month it issued euro-denominated debt and at a low yield of 4.2%, but with a rare 100-year maturity, also called “century bonds.”
Mexico’s €1.5 billion sale of this euro-denominated debt out to March 2115 ensures that it gets funding in the single currency at reasonable rates. This is important for a country like Mexico, which operates in a kind of twilight zone of finance.
Mexico is lumped in with all of the other countries noted as “emerging markets” and suffers from a general lack of access to finance for that reason. However, investors are generally united in their opinion that Mexico has well-run finances. Hence, Mexico can secure relatively low rates for an offering as spectacular as a 100-year bond while investors get an interest rate on euros that looks extraordinarily high in comparison to all of those with a negative sign in front of them. It’s attractive to institutional investors in Europe that are tasked with finding investment-grade debt offerings with reasonable yields.
Our View: Whether this is a good move or not may not be entirely clear for, well, 100 years. Nevertheless, it is a sign of the times, and a valid effort by Mexico to manage its complex finances.
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