The interest-rate swaps market on Mexico's 28-dayTIIE is heating up as an expression of growing confidence in the market and a relative lack of confidence in the U.S. dollar.
Activity has been bolstered by fund managers benchmarked to the Lehman Brothers Investment Grade Bond Index using the swap market to gain increased exposure to Mexico, which has a relatively stable government and currency, said Douglas Ellison, head of structured products group, Americas, at ING. Downgrades of General Motors Corp. and Ford Motor Credit to below investment grade in May made Mexico the second biggest name in the Lehman index, up from fourth before the downgrades, emerging market officials said.
Over the past five years, emerging markets in general and Mexico in particular have seen steady improvement in liquidity and depth--Mexican government bonds now yielding about 8%, compared with 25% in the late 1990s. As a result, many more participants are getting involved in the swaps market, which trades at a spread above the TIIE, and where many of the swap counterparties are rated AA. Underscoring the growth of this market, which officials say is one of the biggest in Latin America, Barclays Capital plans to open a branch in Mexico in the next year, officials at the firm said.
