Debt Management Strategy

2015 Roundtable on Treasury Markets and Debt Management

November 2015
1. Public Debt Management Strategy

2

Direct

(intertemporal funding at an adequate cost-risk 

trade off)

Cost

Risk (refinancing, exchange 

rate, interest rate)

Permanent access to 

several funding sources

Ability to withstand a wide 

range of stress scenarios

Indirect

(strategic role of the yield curve – externalities)

Promote the development of the 

local and foreign debt markets

Yield curve as a benchmark for 

other issuers

Develop a liquid yield curve

Short and long term instruments

1

2

3

4

Funding 

terms 

and 

conditions

Option

to issue

1

2

3

4

Two Main Objectives
3

To cope with the 2008-2009 crisis fiscal and monetary policies 

provided unprecedented stimulus to support aggregate demand.

Significant portfolio adjustment towards emerging markets 

(push and pull factors).

Emerging markets have been strongly influenced by US 

interest rates and changes in global risk appetite.

Low and uneven growth among regions will continue to induce 

FX volatility.

Global conditions and lower growth in China have put pressure in 

commodity prices and some emerging markets.

1

2

3

4

5

2. Global Financial Markets Conditions
3. Debt Management Challenges and Opportunities

4

 Strategic role of the yield curve for aggregate demand management

(externalities)

 Links between monetary policy and public debt policies

• Risk free vs. risky debt (spreads pricing/ratings)

• Role of the central bank and firewalls

 Public debt sustainability (stress testing, etc.)

 Local (national) currency debt

Macroeconomic Dynamics

Regular business-cycle

(incentives well aligned: 

separability principle)

Crisis/crash 

(incentives may differ)

vs
5

Increasing role of foreign investors

•Diversification of the investor base

•Improved price dynamics

•Increased tail-risks (liquidity buffers are needed)

Key role of global benchmarks

Increased correlation in investors’ risk appetite

Regulatory challenges (derivatives, capital ratios, etc.)

Buy and hold investors

Market-makers

Global Portfolio Reallocation (pull-push factors)

Liquidity

3. Debt Management Challenges and Opportunities
2009

2010

2011

2012

2013

2014

2015

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

2.5% 3.5% 4.5% 5.5% 6.5%

Expected Cost

Cost at Risk (95%)

6

Source: SHCP.

Local Debt 

Risk-Cost Trade Off

4. Issuance Strategy

External Debt 

Risk-Cost Trade Off

2009

2010

2011

2012

2013

2014

2015

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

9.0% 11.0% 13.0% 15.0% 17.0%

Expected Cost

Cost at Risk (95%)

Total Debt 

Risk-Cost Trade Off

2009

2010

2011

2012

2013

2014

2015

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

2.70% 3.70% 4.70% 5.70% 6.70%

Expected Cost

Cost at Risk (95%)

Mexico’s debt management strategy takes into account the trade-off between

expected cost and risk to optimize its debt portfolio.
7

Financial Cost

(% of GDP)

Source: SHCP.

Gross Financing Needs

(% of GDP)

e/ Estimated

4. Issuance Strategy

The Federal Government has sought to reduce costs and lower portfolio risks

through an adequate mix of currencies, debt instruments and maturities.

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

19821984198619881990199219941996199820002002200420062008201020122014

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

200620072008200920102011201220132014

2015e
8

Source: SHCP.

Average Maturity of 

External Government Debt

(years)

Government Debt Breakdown by 

Currency*

(%)

97.0

72.3

6.5 

2.7

17.3

0.3 3.9

0

10

20

30

40

50

60

70

80

90

100

2006 2015

USD Yen Euro GBP

* Considers only market debt.

22.0

13.4

0.00

5.00

10.00

15.00

20.00

25.00

06-I

06-III

07-I

07-III

08-I

08-III

09-I

09-III

10-I

10-III

11-I

11-III

12-I

12-III

13-I

13-III

14-I

14-III

15-I

15-III

With UMS 100yr

Without UMS 100yr**

**Excludes UMS, EUR, USD and GBP 100 year bonds.

4.1. External Markets Strategy

Diversify funding sources and extend average maturity
9

Source: SHCP.

4.1. External Markets Strategy

Maturity extension objectives: lower refinancing risk, increases diversification,

broadens the investor base and helps differentiate from other issuers.

UMS Yield Curve

(%)

UMS 2026

UMS 2046

UMS 2110

UMS 2024

UMS 2045

UMS 2115

0.0

1.0

2.0

3.0

4.0

5.0

6.0

0 5 10 15 20 25

Duration

USD

EUR

New investors in USD and EUR 100-year issuances* 

(million)

1,843 1,500

45.8%

54.2%

30.7%

69.3%

* Order book compared to immediately prior 10 and 30 year bond issuances in each currency.

USD 1 0 0 YEAR EUR 1 0 0 YEAR

Investors in previous 10 and 30 year bonds New Investor Base

45.8%

54.2%

30.7%

69.3%
10

Source: SHCP.

Average Maturity of 

Local Government Debt

(years)

4.2. Local Markets Strategy

The relative importance of short-term and floating rate notes has diminished and

duration has been increased (between 7-8 years since 2011).

8.0

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

06-I

06-IV

07-III

08-II

09-I

09-IV

10-III

11-II

12-I

12-IV

13-III

14-II

15-I

45.2

54.8

9.9

25.1 22.0

14.1 22.9

5.9

0

10

20

30

40

50

60

70

80

90

100

2006 2015

Fixed Rate Bonds Inflation Linked Bonds

Cetes Floating Rate Notes

Composition of Local Government 

Debt

(%)

Mexico’s Yield Performance

(USD and Peso)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

ene.-08

jul.-08

ene.-09

jul.-09

ene.-10

jul.-10

ene.-11

jul.-11

ene.-12

jul.-12

ene.-13

jul.-13

ene.-14

jul.-14

ene.-15

jul.-15

10 yr UST

10 yr UMS

10 yr Mbono
11

M Bonds Yield Evolution

2008-2015

(%)

Source: SHCP.

24oct08 24oct08

24oct08 24oct08 24oct08

9may13 9may13

9may13

2may13 2may13

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

3 year 5 year 10 year 20 year 30 year

Average Actual

4.2. Local Markets Strategy

Local debt markets have coped well with complex and challenging external

conditions in the last years.

The box limits are the 75th and 25th percentile.

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

3 year 5 year 10 year 20 year 30 year

Average 4Q-15

Quarterly Issued Amounts of M Bonds

2008-2015

(million pesos)

Max

Min

Max

Min
12

Source: SHCP.

4.3. Stress Tests

Foreign holdings of local securities have been resilient to volatility episodes.

4

5

6

7

8

9

10

11

12

8

10

12

14

16

18

2007 2008 2009 2010 2011 2012 2013 2014 2015

Yield

Exchange Rate

Exchange Rate

Yield

Financial

Crisis

oct08-dec09

European

Crisis

mar11-jun12

Tapering

jun13-dec13

Current

aug14-sep15

Exchange Rate (USD-MXN) and 10yr M Bond

-1.000

-0.800

-0.600

-0.400

-0.200

0.000

0.200

0.400

0.600

0.800

1.000

10%

20%

30%

40%

50%

60%

2007 2008 2009 2010 2011 2012 2013 2014 2015

% of total M Bonds outstanding

Financial

Crisis

European

Crisis Tapering Current

M Bond Foreign Holdings
5. Final Remarks

13

Debt Management Strategy

 A sound debt management strategy is a key element of strong macroeconomic 

fundamentals

 Importance of flexibility in debt issuance programs (consider market conditions -

local and external risk appetite)

 Debt Managers should maintain a wide range of options regarding funding 

alternatives (option to issue)

 Diversify the investor base (look for less correlated investors)

 Consider the strategic role of the yield curve:

o Aggregate demand tool

o First building block in any funding in national currency (corporates and 

households) 

 Importance to be perceived as a regular and predictable issuer in local currency 

funding 

 Consider flexible issuance and hedging strategies (timing) in markets where you are 

not a price setter (funding vs exposure)