costlyre
19Oct/100

a bird in the hand or two in 2043?

a bird in the hand or two in 2043?

Mexico raised just under a $ billion at a 5.75% coupon with a $ billion repayable in 2110. Yes, the world just gave the Mexican government a billion dollar bird.

In 34 years we will have collected our 2 from the bush (assuming that the Mexican government or its placeholding drug cartel keeps paying its rental rate).

Looked at another way, the present value of the cash flow coming from that Mexican bond will only justify the world’s investment if Mexico keeps current through 2037.

Can the Mexican government pay its interest for the next 27 years?

Well its last default, by coincidence, occurred 28 years ago (though it was a near thing in ‘94), and they’ve defaulted 3 times over the past 110.3 At that rate, in 4 out of 10 futures the investment will not be justified.

Put another way, at a 3% default rate the present value of the world’s investment measured over the entire lifespan of the bond works out to 80 cents on the dollar

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