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Mexican Government Issues Two More International Bonds

Low Vol: A little goes a long way

Rieger Report: Insured municipal bonds remain cheap

The True North Strong and Free! (But Not Free From Debt)

Rieger Report: Puerto Rico Watch

Mexican Government Issues Two More International Bonds

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Jaime Merino

Director, Asset Owners Channel

S&P Dow Jones Indices

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In spite of the complex and volatile global markets, the Mexican government issued bonds in the international market for the second time this year.  In January 2016, it issued USD 2.25 billion in bonds with a coupon of 4.125%, and on Feb. 16, 2016, it issued two other types of bonds denominated in euros, totaling € 2.5 billion, or approximately USD 2.8 billion.  All of this adds up to a total of USD 5 billion, which represents 80% of the foreign debt financial needs for 2016.

The new bonds issued in euros were issued with a yield close to historic minimums in the euro market.  The first was for € 1.5 billion, with a maturity in 2022, which was offered at a yield of 1.98% and a coupon of 1.875%.  The second was for € 1 billion, maturing in 2031 at a yield of 3.424%, with a coupon of 3.375%.  The demand had a ratio of 1.76, with more than 280 international investors.  According to the Ministry of Finance (Secretaría de Hacienda y Crédito Público), the level of participation showed the trust in public finances and the good management of public debt.  Also, it established new references to provide liquidity to the yield curve in euros.

Considering the bond issuances since 2010, Exhibit 1 illustrates the amount issued in U.S. dollars (taking into account bonds in U.S. dollars, euros, British pounds, and Japanese yen), divided by maturity.  We can see that 44% of the total (USD 20.75 billion) will mature between 2021 and 2030.  Exhibit 2 shows the amount issued by currency and that 61% of the total amount is issued in U.S. dollars.

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S&P Dow Jones Indices seeks to track the bond issuances in U.S. dollars with a maturity of over one year with the S&P/Valmer Mexico Government International 1+ Year UMS Index.  Exhibit 3 shows the annual returns of the index for the past five years and the depreciation of the Mexican peso against the U.S. dollar.  We can see that annual high returns are correlated with a depreciation of the currency.

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The posts on this blog are opinions, not advice. Please read our Disclaimers.

Low Vol: A little goes a long way

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Chris Bennett

Director, Index Investment Strategy

S&P Dow Jones Indices

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We’ve written at length of the many historical benefits of the low volatility anomaly. The S&P 500 Low Volatility Index selects the 100 least- volatile members of the S&P 500 index; lacking any sector constraints, the index seeks to provide pure exposure to the low volatility factor. In doing this, it has experienced a large tracking error (9.5%) relative to the S&P 500.

Some asset owners are not comfortable with such a large tracking error. While it would be easy to dismiss low vol on the grounds of tracking error, the decision need not be binary.   The chart below plots the tracking errors at various levels of exposure to the S&P 500 Low Volatility index. The remainder of the equity exposure in these points is to the S&P 500. For example, if 50% is allocated to Low Vol, the other 50% is allocated to the 500.

Source: S&P Dow Jones Indices. Back-tested data from December 31, 1990 through December 31, 2015. The S&P 500 Low Volatility Index was launched on April 4, 2011. All data prior to that date are back-tested. Charts are provided for illustrative purposes. Past performance is no guarantee of future results. This chart may reflect hypothetical historical performance.
Source: S&P Dow Jones Indices. Back-tested data from December 31, 1990 through December 31, 2015. The S&P 500 Low Volatility Index was launched on April 4, 2011. All data prior to that date are back-tested. Charts are provided for illustrative purposes. Past performance is no guarantee of future results. This chart may reflect hypothetical historical performance.

The key takeaway is that tracking error increases proportionally as low vol allocation is increased. Unsurprisingly, the benefit of exposure to low vol increases as allocation to low vol increases.

Source: S&P Dow Jones Indices. Back-tested data from December 31, 1990 through December 31, 2015. The S&P 500 Low Volatility Index was launched on April 4, 2011. All data prior to that date are back-tested. Charts are provided for illustrative purposes. Past performance is no guarantee of future results. This chart may reflect hypothetical historical performance.
Source: S&P Dow Jones Indices. Back-tested data from December 31, 1990 through December 31, 2015. The S&P 500 Low Volatility Index was launched on April 4, 2011. All data prior to that date are back-tested. Charts are provided for illustrative purposes. Past performance is no guarantee of future results. This chart may reflect hypothetical historical performance.

A fund comfortable with 4% tracking error may resist a 100% allocation to low vol but could still benefit from a 40% allocation.  Historically, that would have provided enhanced return with a reduction in volatility versus the S&P 500. When it comes to low vol, a little exposure goes a long way.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Rieger Report: Insured municipal bonds remain cheap

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J.R. Rieger

Head of Fixed Income Indices

S&P Dow Jones Indices

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Okay, the mono-line insurance companies aren’t going to enjoy this note.  After all, yields of insured bonds should be lower than bonds that are un-insured.  Prior to the great recession approximately half of the municipal bonds outstanding were insured and during that time insured bonds were more in demand than un-insured bonds.  Beginning with the great recession we have seen yields of insured bonds higher than un-insured bonds as questions about the viability of the insurers themselves were prominent worries in the market place.  It is understood that not all mono-line insurers are the same credit quality, some are stronger than others.  However, in aggregate the impact is impressive.

Using the weighted average yields of bonds in the S&P Municipal Bond Insured Index and the S&P Municipal Bond Investment Grade Index the difference can be highlighted. The result has been yield ‘pickup’ between insured and investment grade municipal bonds as of Feb. 25 2016 was 28bps.  In general, it is cheaper to buy insured bonds than un-insured bonds and as a result returns have been higher.

Chart 1: Select municipal bond indices and their yields and returns over three year period

Source: S&P Dow Jones Indices, LLC.  www.spindices.com.   Data as of February 25, 2016.
Source: S&P Dow Jones Indices, LLC. www.spindices.com. Data as of February 25, 2016.

The risk of generalizing or over simplifying the complex municipal bond market  is inherent in any broad analysis.  Each issuer and each mono-line insurer has their own credit profile. The indices aggregate the bonds to provide the weighted average statistics used.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

The True North Strong and Free! (But Not Free From Debt)

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Kevin Horan

Director, Fixed Income Indices

S&P Dow Jones Indices

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Lyrics to the Canadian national anthem, “O Canada,” state “The true north strong and free!”  Like in the U.S and many other countries, government and corporate debt has become a big issue in Canada.

The Canadian overnight rate stands at 0.5% and will most likely remain unchanged or decrease even more.  Central Bank Governor Stephen Poloz’s decision on Jan. 20, 2016, to keep the benchmark rate at 0.5% halted a slide in the currency.

With rates so low, governments have been looking to more than just monetary policy to stimulate their economies.  The newly elected Canadian government has looked to infrastructure spending as a way to grease the economic skids.  Prime Minister Justin Trudeau said the federal government would fast-track infrastructure spending.

The newly elected liberal government said the deficit could swell to CAD 30 billion in the 2016-2017 fiscal year amid a starkly weaker outlook for the economy.  Such a large deficit would be 1.5% of GDP.  Compared to the amount of debt the U.S. carries, with obligations to other countries such as China, Canada’s AAA rating and debt amount look pretty good, but investors should be aware that the situation is and will be changing.  Larger amounts of longer-term debt may make the Canadian indices more sensitive to interest rate movements.

Exhibit 1 shows the percentage changes in the Canadian dollar amount of debt for each fixed income asset class for 2015.  The amount of debt outstanding for 2016 is expected to grow as the new government’s policies are put into place.

Exhibit 1: Index Increases of Market Value
Douglas Porter Quote

Canada Fixed Income Annual Issuance

Source: S&P Dow Jones Indices LLC.  Data as of Dec. 31, 2015.  Past performance is no guarantee of future results.  Chart is provided for illustrative purposes. *Globe and Mail, BoC holds rates; bets stimulus, global gains will ease economic pain, Barrie McKenna, January 20, 2016.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Rieger Report: Puerto Rico Watch

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J.R. Rieger

Head of Fixed Income Indices

S&P Dow Jones Indices

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Another way to track the impact of the storm that is Puerto Rico is to look at the municipal bond market in two ways: with and without Puerto Rico.  The new S&P Municipal Bond High Yield ex Puerto Rico Index excludes any bond issued by Puerto Rico.  Puerto Rico bonds are included in the S&P Municipal Bond High Yield Index  and as a result add 129bps to the yield of the entire muni junk bond market (as of Feb. 24, 2016).

Chart 1: S&P Municipal Bond High Yield ex Puerto Rico vs. S&P Municipal Bond High Yield Index

Source: S&P Dow Jones Indices, LLC. www.spindices.com. Data as of February 24, 2016.
Source: S&P Dow Jones Indices, LLC. www.spindices.com. Data as of February 24, 2016.

 

The posts on this blog are opinions, not advice. Please read our Disclaimers.