Permanent Zero and Unbelievably Low Yields in Mexico

When faced with a balance sheet recession and anaemic demand growth, Japan pushed short-term interest rates to zero and preceded to print money. This created the infamous Japanese carry trade in which Japanese investors would buy high-yielding assets abroad in order to escape the permanent zero (PZ) interest rate policy of the Bank of Japan. This trade went spectacularly bust in 2008 due to extreme currency rate volatility.

But the carry trade is back on and now the Americans are at it too with the Fed’s own PZ policy.  The result, 100-year bonds with a 6% handle in Mexico (hat tip Felix Salmon).

Mexico brought its first century bond to market on Tuesday, said sources familiar with the deal, in a bold government move to secure relatively cheap financing from global investors eager to lend.

The first tranche of $500 million in debt was being auctioned on Tuesday and expected to yield between 6 and 6.125 percent, according to sources familiar with the deal. Mexico could later add to that bond with further auctions.

Mexico’s benchmark 10-year note hit record lows this year as yield-hungry investors have turned to developing countries for returns that outpace U.S. Treasury bonds and some of the world’s other ultra-safe debt.

A nice yield pickup for the liquidity seeking return crowd? Happy days are here again. Next stop Argentina.

Easy PZ it is. This kind of thing works until it doesn’t.