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How To Buy Mexican Government Bonds

The Treaty of Guadalupe Hidalgo, which brought an official end to the Mexican-American War (1846-48), was signed on February 2, 1848, at Guadalupe Hidalgo, a city to which the Mexican government had fled with the advance of U.S. forces.

how to buy mexican government bonds

With the defeat of its army and the fall of the capital, Mexico City, in September 1847, the Mexican government surrendered to the United States and entered into negotiations to end the war. The peace talks were negotiated by Nicholas Trist, chief clerk of the State Department, who had accompanied General Winfield Scott as a diplomat and President Polk's representative. Trist and General Scott, after two previous unsuccessful attempts to negotiate a treaty with President Santa Anna, determined that the only way to deal with Mexico was as a conquered enemy. Nicholas Trist negotiated with a special commission representing the collapsed government led by Don Bernardo Couto, Don Miguel Atristain, and Don Luis Gonzaga Cuevas.

President Polk had recalled Trist in October 1847 under the belief that negotiations would be carried out with a Mexican delegation in Washington. In the six weeks it took to deliver Polk's message, Trist received word that the Mexican government had named its special commission to negotiate. Trist determined that Washington did not understand the situation in Mexico and negotiated the peace treaty in defiance of the president.

The U.S. government paid Mexico $15 million "in consideration of the extension acquired by the boundaries of the United States" and agreed to pay American citizens debts owed to them by the Mexican government. Other provisions included the protection of property and civil rights of Mexican nationals living within the new boundaries of the United States, the promise of the United States to police its boundaries, and compulsory arbitration of future disputes between the two countries.

Immediately upon the ratification of the present treaty by the Government of the United States, orders shall be transmitted to the commanders of their land and naval forces, requiring the latter (provided this treaty shall then have been ratified by the Government of the Mexican Republic, and the ratifications exchanged) immediately to desist from blockading any Mexican ports and requiring the former (under the same condition) to commence, at the earliest moment practicable, withdrawing all troops of the United States then in the interior of the Mexican Republic, to points that shall be selected by common agreement, at a distance from the seaports not exceeding thirty leagues; and such evacuation of the interior of the Republic shall be completed with the least possible delay; the Mexican Government hereby binding itself to afford every facility in its power for rendering the same convenient to the troops, on their march and in their new positions, and for promoting a good understanding between them and the inhabitants. In like manner orders shall be despatched to the persons in charge of the custom houses at all ports occupied by the forces of the United States, requiring them (under the same condition) immediately to deliver possession of the same to the persons authorized by the Mexican Government to receive it, together with all bonds and evidence of debt for duties on importations and on exportations, not yet fallen due. Moreover, a faithful and exact account shall be made out, showing the entire amount of all duties on imports and on exports, collected at such custom-houses, or elsewhere in Mexico, by authority of the United States, from and after the day of the ratification of this treaty by the Government of the Mexican Republic; and also an account of the cost of collection; and such entire amount, deducting only the cost of collection, shall be delivered to the Mexican Government, at the city of Mexico, within three months after the exchange of ratifications.

Many investors have turned to emerging market bonds seeking higher returns in the current low interest rate environment. This raises a natural question about the potential for financial instability if investors choose to sell off those bonds quickly. Studying how changes in foreign holdings of Mexican government bonds known as bonos affected their liquidity premiums provides an assessment of the risks and benefits from foreign investment in an emerging economy. Results show that the larger foreign market share of Mexican sovereign bonds tends to increase their liquidity risk premium.

The current low level of interest rates in global financial markets has sent investors around the world in search of higher yields. Many have turned to emerging markets to purchase government bonds, also known as sovereign debt. In light of the history of sovereign credit crises in emerging markets, especially in Latin America, significant debt purchases from investors outside the border could pose some risks to financial stability. That risk could be exacerbated if the markets were to reverse too quickly, say in response to interest rate increases from the normalization of monetary policy in advanced economies in coming years (Avdjiev et al. 2017). Hence, it seems warranted to study the role of foreigners in emerging markets.

In this Letter, we focus on the effects that changes in foreign holdings have on the liquidity premiums of government bond prices in Mexico. To do so, we use a yield curve model of Mexican government bond prices that accounts for liquidity risk to measure their embedded liquidity premiums, which have grown in recent years. We find that increases in the share of Mexican sovereign bonds held by foreigners tend to raise the liquidity premiums of these assets. The large increase in the share of foreign holdings during our sample period implies that foreigners have played a significant role in raising liquidity premiums. This might be because foreign investors buy and hold the bonds rather than actively trade them, thus reducing the amount of bonds available for sale or purchase on any given day. However, as long as the increased liquidity premium compensation is commensurate with the risk of a major market sell-off, our findings suggest this may not pose a material risk to financial stability at this point.

A key strength of the data is that they cover any changes in Mexican sovereign debt holdings by either domestic or foreign investors. For each transaction, the reporting forms also identify the type of Mexican government security. Therefore, we are able to concentrate specifically on holdings of standard Mexican fixed-coupon government bonds denominated in Mexican pesos, known as bonos. We use the observations from the last day of each month starting in June 2007 to align with the timing of our bond price data.

To estimate the model and identify the liquidity factor, we use bond prices at the end of each month from June 2007 to December 2017, available on Bloomberg. For maturing bonds, we end the data three months before expiration to avoid erratic prices close to maturity.

In general, we think of liquidity risk as having a negative effect on the market price or, equivalently, implying a higher yield for individual bonds. However, our model is flexible enough to allow for negative liquidity premiums, if the data call for that. We identify the liquidity premium effect by calculating the fitted yield for each bond with and without the liquidity factor; we then back out the liquidity premium based on the difference in the fitted yield values. Figure 2 shows the average of these liquidity premium estimates over all bonds trading at each point in time (red line).

The estimated liquidity premium is relatively quite large, averaging 0.32%. For comparison, the liquidity premium advantage of newly issued 10-year U.S. Treasuries over comparable seasoned securities has averaged less than 0.15% over the past two decades (Christensen, Lopez, and Shultz 2017). Hence, liquidity risk is an important component in the pricing of Mexican government bonds. We also see significant variation around a general upward trend during our sample period, with notable spikes in the summer of 2011 and spring of 2014 and a persistent decline in the fall of 2016. The empirical question we are interested in is to what extent this variation can be explained by changes in the foreign-held share of the Mexican bonos market, shown as the blue line in Figure 2.

Another potential explanation is that investors may expect that the probability of a major sell-off has increased as foreign holdings of Mexican government debt have grown. This may be more likely as the United States begins to normalize monetary policy and raise its related interest rate. Anticipating such interest rate increases would seem like a justifiable concern, and demanding higher liquidity premiums would be a potential consequence. According to this explanation, our results would imply that investors are being compensated for the added liquidity risk in case these flows reverse in coming years. However, even if the flows reverse, as long as the increased compensation is commensurate with the risk of such events, the expanded role of foreigners may not pose a material risk to the financial stability of the Mexican government bond market at this time.

In this Letter, we analyze the relationship between foreign holdings of Mexican government bonds and the premiums investors demand for assuming their liquidity risk. Our results show that increases in the share of foreign holdings tend to push up liquidity premiums in the bonos market. Although foreign holdings of Mexican bonos have increased significantly in recent years, which has most likely contributed to rising liquidity premiums, this in itself may not pose a risk to financial stability. It depends on whether the uptick in liquidity premium compensation is adequate relative to the underlying risk of any major bond sell-off in coming years. More broadly, this type of research may shed light on the important role that foreign investors play for the stability of financial markets in emerging economies. 041b061a72


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