We have located AA rated General Electric Capital Mexican peso denominated bonds maturing October 5, 2015, and are anticipating a better than 5.5% yield for our clients.
Corporate Bond linked to Mexican Peso
General Electric has bonds denominated in the Mexican peso with an expected yield of over 5.5% for 40months. This debt instrument carries over 2.5x’s the yield of similar maturity GE bonds denominated in US dollars, while adding exposure to Mexico’s economy and the peso. This slightly over four year bond provides diversification into a country that experienced positive growth of over 5% in 2010, and into a currency that in two years has strengthened over 11% relative to US Dollar. The short maturity, relatively well known strength of GE Capital, and higher yield that this bond offers work well with an overall laddering strategy to diversify our clients away from the devaluation risk of overweighted US dollar based assets, and it is why we have selected it for This Week’s Best Bond.
US Dollar Concerns
Now that talk of an impending collision with US debt-ceiling has abated, back to back rounds of dismal GDP figures and disappointing economic reports have renewed worries of a “double dip” recession. The ever vigilant bond market wasted no time in responding to fears of a faltering recovery by driving yields to new lows and quickly stirred rumors of the Fed’s need to inject more dope (QE3) into an already heavily sedated economy. Very little mention is made of the M1 money supply, which since January of 2011 has increased over 15%. If inflation is not a side effect of the Fed chief’s prescriptive comatose, a increased devaluation of the dollar could be realized.
With Gold futures blasting to new high, perhaps it would be interesting to revisit what our 37th President Richard Nixon told the American people (after closing the gold window) in August of 1971 about devaluation. “If you want to buy a foreign car or take a trip abroad, market conditions may cause your dollar to buy slightly less. But if you are among the overwhelming majority of Americans who buy American-made products in America, your dollar will be worth just as much tomorrow as it is today.” With that said many Americans feel after forty years of a devaluated currency, greatly accelerated since the last stock market crash, has significantly reduced the dollar’s buying power so much that many wonder if they have enough cash to simply fill up the gas tank.
The problem is that most American’s home, income, car and life savings are all directly tied to the strength (or lack thereof) of the US dollar. Administration after administration has continued to exploit the advantage of the dollar’s status as the world’s reserve currency. However, most countries that have utilized the US dollar as their reserve currency are now reducing their dependence on it, and thus, a historic erosion of the value of the US dollar has materialized. With the dollar’s buying power being diluted now at a very rapid pace, unless the government’s gravy train of printing more money comes to an end, or unprecedented corrective actions occur, this sort of fiat monetary policy typically ends in a significant reduction and/or a great impairment to all US dollar based wealth.
The economy of Mexico is 13th largest in the world in nominal terms and 11th by purchasing power parity, according to the World Bank, and the United Nations reports that Mexico’s standard of living – including health, education and per capita income – is now higher than Russia, China and India. As an export oriented economy in the trillion dollar class, it remains integrally correlated to the US economy because of its prominent role at 80% of exports trading partner. However, Mexico’s 2010 debt to GDP ratio stood at 34% compared to our forecasted 100% for the US, while unemployment was about 5.7% compared to 9.7% for the US. Inflation rates for Mexico were reported at 3.28% in June, down from over 4% at the end of 2010, and slightly less than the 3.6% given for the U.S.
While banking giant HSBC recently announced plans to cut back on retail operations in the US and cut 30,000 jobs worldwide, it said that it instead intends to focus on faster growing emerging markets like Brazil and Mexico, where the company is still hiring. Interestingly, Chinese tourism to Mexico increased 32.8% in 2011, and Japanese automaker Honda (which already has a plant in El Santo, Jalisco) plans to invest about 312 million dollars to build a new 100,000 vehicles per year capacity car plant near Jalisco. Mexico’s economy is expected to grow over 4.5% in 2011.
G.E. Capital provides commercial lending and leasing, as well as a range of financial services for health care, media, communications, entertainment, consumers, real estate, and aviation. GE Capital focuses primarily on loans and leases that it underwrites to hold on its own balance sheet rather than on generating fees by originating loans and leases, then selling them to third parties. Most of GE Capital’s commercial loans are to small and mid-sized companies, spread across multiple industries and geographies and secured by tangible assets. More than 70% of GE Capital’s loans are under $100 million. G.E. Capital had 60,000+ employees worldwide, operating in more than 55 countries, G.E. Capital currently have a stable rating (Aa2, AA+), see our Ratings Guide.
G.E. Capital continues to battle with the aftermath of the 2008 financial crises hitting the middle financial market they serve, but has shown good strength posting $1.8 billion in profit for first quarter of 2011.
G.E. forecasts that the company’s profit growth should accelerate in the second half of 2011 and all of 2012 as the company emerges from recession with a simpler group of businesses. With the improved profits, G.E. announced that they will increase its dividend. The company’s Chairman and Chief Executive Jeff Immelt called the latest dividend increase a show of confidence in G.E.’s outlook but said the company aims to eventually return to its pre-recession tradition of predictable, annual increases.
The default risk is GE’s ability to perform. GE Capital continues to battle with the aftermath of the 2008 financial crises hitting hard the middle financial market they serve, but G.E. has show good strength showing $1.8 billion in profit for first quarter of 2011. They have reshaped their business, while reducing their exposure to GE Capital. Given its high quality AA+ credit rating, improving financials, and short term maturity of this bond, it is our opinion that the default risk is significantly less than the currency risk of the Mexican peso.
The currency risk could and will affect the returns of these bonds and possibly in a negative way as it exposes investors to Mexico’s economy.
Per capita income in Mexico is roughly one-third that of the US, and income distribution remains highly unequal. The current Mexican administration continues to face many economic challenges, including improving the public education system, upgrading infrastructure, modernizing labor laws, and fostering private investment in the energy sector. Because of the dominance of exports to the US, its economy will remain correlated to that of the US.
How can retail investors participate in Mexican peso denominated bonds? Achieving an institutional sized yield typically requires an institutional sized bond purchase. To facilitate attaining a more attractive yield, here at Durig Capital we bring together many retail bond buyers into a single much larger institutional sized trade. In this week’s syndicate, we anticipate being able to accommodate purchases as low as $ 5,000 US Dollars should that the level that best fits with your interest. So the answer to the question is simple – contact your Durig professional.
How do investors protect themselves from a continued or possibly accelerated devaluation of the US dollar as a result of the US government’s protracted deficit spending and the relentless injection of new “stimulus” dollars into the global market? We believe that diversification into similar corporate debt instruments denominated in various foreign currencies offers an effective hedge against the continued devaluation of the US dollar. The higher yield is actually an added bonus; either mitigating possible currency moves against the US dollar or adding significantly to the return should the dollar continue to lose buying power against the peso.
As a result, it is our opinion that the combination of a short term, high yielding debt in Mexican peso, offered by a financially sound and well respected corporation, offer an intelligent and calculated hedge against the US dollar’s continuing loss of buying power, which is why we are adding it to our Foreign and World Fixed Income holdings.
Durig Capital clients may currently own these General Electric bonds.
To know more about this General Electric bond call our fixed income specialist at 971-327-8847.