Reuters tells us that hedge funds that had previously steered clear of the Mexican mortgage backed bond market, deeming it to be too small, are now stepping up their investments there in the wake of US subprime problems.
It won’t take much in the way of capital inflows to lower interest rates of Mexican MBS, which could lead to a repeat of the US pattern: overeager lending due to demand in the capital markets for product.
As subprime worries wreak havoc in the U.S. housing market, Mexican mortgage-backed bonds are attracting growing interest from foreign hedge funds.
Some international investors, who previously shunned the Mexican mortgage market because of its relatively small size, are beginning to buy in, with issues paying yields as much as 2 percentage points above comparable U.S. Treasuries.
“We’ve seen stronger interest in the Mexican market from some international investors now that we’ve seen some adverse outcomes in the U.S. subprime market,” said Luis Arce, chief financial officer of New York hedge fund Christofferson, Robb and Company, which manages $1.5 billion of assets.
But now Mexico’s mortgage industry is attractive compared to the gloomy U.S. sector — and is expanding fast.
Outstanding mortgage-backed bonds in Mexico stand at $6 billion, having grown from virtually nil in 2003.
The market is likely to double in size annually for the next three years, according to Edward Skelton, an economist at the Dallas Federal Reserve Bank.
By comparison, U.S. companies placed about $300 billion last year in mortgage-backed debt, which normally carries high credit ratings because it is backed up by underlying loans.
Trouble in the U.S. subprime market, which caters to borrowers with troubled credit histories, has hit lenders as homeowners fall behind with mortgage payments, forcing dozens of firms out of business or into bankruptcy protection.
In Mexico, a ballooning population, a housing shortage and a stable economy are leading to fast growth in lending, with no need to resort to risky forms of lending such as subprime.
Hedge funds, which tend to have fewer investment restrictions than other kinds of institutional funds, already had a minor presence in the Mexican mortgage-backed debt market and are now increasing their interest, experts say.
“It’s the same investors, but they’re a little further along the learning curve,” said Jesus Robles, head of structured finance at GMAC Mexico, a specialist mortgage lender in Mexico.