Teacher Strike Imperils Pimco's Bond Bet

Foreign investors like Pimco leapt into Mexico's bonds. Now that President Pena Nieto's reforms are facing serious opposition, those investments look risky.

For Pedro Hernandez, a striking elementary-school teacher from the southern state of Oaxaca, his union’s protests disrupting Mexico’s capital aren’t just about education. They’re about stopping President Enrique Pena Nieto.

“We’re against all the structural reforms,” the 37-year-old said last week as he walked down Mexico City’s central boulevard as part of an organized march of 15,000. Hernandez held a sign that read “Mexico has no president.”

The demonstrations, which persuaded Mexican lawmakers to delay votes on education-reform legislation that would have subjected teachers to standardized evaluations, are a sign to Barclays Plc that Pena Nieto may struggle to push through his energy and tax-law plans without modification.

Opposition to those pledges, which carried him to victory in July 2012, is also undermining confidence in Mexico’s economy that led foreign investors such as Pacific Investment Management Co. (Pimco) to increase bond holdings to a record this year.

Yields on Mexico’s peso-denominated bonds due in 2024 have climbed 1.93 percentage points from a record low on May 9, losing 18 percent in dollar terms over the period compared with 10 percent average drop across emerging markets. Dollar-based losses were exacerbated by a local currency that slid 4.8 percent against the dollar in August, the most in Latin America.

“The education reform shows that it’s not going to be easy for the government to pass other reforms that hurt certain political groups or interests,” Marco Oviedo, chief Mexico economist at Barclays, said in a telephone interview from the country’s capital. “It’s not going to be a picnic.”

Foreign holdings of Mexico’s fixed-rate bonds surged to a record 1.16 trillion pesos ($87 billion) in May after Pena Nieto worked with rival parties to craft constitutional changes that led to the education bill. He also signed telecommunications legislation meant to boost competition and foreign investment in the industry.

Barclays said last month that the president’s proposal to break the state oil company’s 75-year monopoly on drilling in the country would attract investment, potentially adding 1.5 percentage points to Mexico’s potential economic growth.

Pimco, the world’s biggest bond fund manager, is the biggest holder of Mexico benchmark peso-denominated bonds due in 2024, according to filings data compiled by Bloomberg. Officials in Pimco’s press office didn’t respond to an e-mailed request for comment on whether the teacher protests were impacting the company’s outlook on Mexican debt.


‘All Instruments’

Pena Nieto said yesterday in the annual presidential address to the nation that he “knew beforehand that to achieve great transformation in Mexico would be complicated.

“I’m determined to use all instruments of a democratic state to promote the transformation that the majority of Mexicans demand,” the 47-year old former governor said in a tent pitched on a lawn outside the presidential mansion. As he spoke, synchronized videos of oil rigs and power plants played on overhead screens.

Over the past two weeks in Mexico City, the protesters set up a tent city in the capital’s main square, blocked access to Mexico City’s airport long enough to delay as many as 60 flights, and amassed outside Congressional chambers, forcing legislators to meet at alternate sites.

The strain on police resources also caused a professional soccer game to be postponed, the daily Reforma reported last week on its website. Pena Nieto’s government cited protesting teachers as a reason the president pushed off his state of the union speech to yesterday from Sept. 1.

After rescheduling last month’s education vote until later this week, Mexico’s lower house of Congress on Sept. 1 accelerated the tally to that night. The bill passed with 390 votes in favor and 69 against.

“The new government is going to have to show here if it really has authority and sufficient power to pass all of these reforms,” Araceli Espinosa, a fixed-income analyst at the local unit of Scotiabank. “This moment is very, very important.”

The teachers will join protests against Pena Nieto’s oil industry reform proposal that Andres Manuel Lopez Obrador, the runner-up in last year’s presidential race, has scheduled for Sept. 8, according to Inesimo Pelaez, an organizer of the recent marches.

“We could block banks, toll booths or airports,” Pelaez said in an Aug. 28 interview.


‘Natural Reaction’

Alejandro Diaz de Leon, who oversees government bond sales as head of public debt at the Finance Ministry, said the scale of the demonstrations is “a natural reaction and reflects the reach of reforms.

“This is a proposal that changes the status quo, and this could generate a certain inconvenience for some groups and a certain optimism and encouragement for others,” he said in a telephone interview on Aug. 30. “In the short term there could be tension, protests and disruptions.”

Edwin Gutierrez, a fund manager who helps invest about $10 billion of emerging-market debt including Mexico government bonds at Aberdeen Asset Management Plc, says the education protests are little more than a sideshow.

“The whole focus remains very much on what’s going on [with] energy reform,” Gutierrez said by phone from London. “As long as they push forward with the schedule that they have, the market’s happy.”

The extra yield investors demand to hold Mexican government dollar bonds instead of U.S. Treasuries fell seven basis points to 215 basis points at 10:52 a.m. in New York, according to JPMorgan Chase & Co.’s EMBI Global Diversified index.

Mexico’s five-year credit default swaps, contracts that protect holders of the nation’s debt from non-payment, rose three basis points to 135 basis points, according to data compiled by Bloomberg. Mexico’s peso slid 0.9 percent to 13.4496 per dollar.

Hernandez, the striking teacher, says the reforms “are damaging our country,” and that Pena Nieto “is stomping on” Mexico through legal changes that won’t benefit the poor. He’s a local precinct secretary general for the teacher’s union CNTE, which is leading the demonstrations.

Barclays’s Oviedo today is hosting an investor conference in Mexico City on the reforms. The risks posed by demonstrations is on the agenda, he said.

“There’s a probability again to see protests of different groups that are opposed to” energy reforms that involve constitutional changes as Pena Nieto has proposed, Oviedo said in the interview. “That is the next test for the government.”

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