Thursday, October 7, 2010

Investing in Mexico for 100 years

Mexico sold a new bond with a maturity in 100 years to international investors. And the demand for such a bond was good, indicated by the sharp rise in price in the secondary market.

I bet that only few individual investors would be interested in such a bond as to most of us it seems a risk not calculable.

Not so for institutional investors like insurance companies and pensions funds. They need investments with a "good" yield and a duration similar to their liabilities. They don't care about inflation and long term risks as they only have to seek a solution for their "asset-liability-mismtach", meaning that they need assets to fulfill their obligations mature in 10 or 20 years time.

This may or may not be in the interest of the customer, but it is definitely in the interest of their companies. But we should not be so negative on these "trustees". Investing of a small amount in a longer bond is from a pure bond mathematical standpoint a safer bet than to invest a bigger stake of funds in a bond, maturing in 10 or 15 years. The reason for that lies in the convexity of long term bonds and the advantage of a barbell position over a bullet position.

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