PEMEX (Petróleos Mexicanos) Bonds --- investment grade --- nice yield

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7eight9
Posts: 125
Joined: Fri May 17, 2019 7:11 pm

PEMEX (Petróleos Mexicanos) Bonds --- investment grade --- nice yield

Post by 7eight9 » Fri Jun 14, 2019 5:40 pm

I was sitting around today thinking that maybe there is a way that we can get a little better yield on the fixed income side. Our portfolio is roughly 2/3 cash/CDs/money market.

viewtopic.php?f=1&t=281420&p=4551153#p4551153

PEMEX sparked my interest. A quasi-governmental oil company whose bonds are investment grade (not by much). So I dipped my toe in and bought some 5.375% 03/13/2022 (CUSIP 71654QCE0). It has a 4.8% YTM. So less than three years to go - double what a CD would pay. I was kind of interested in going out a little bit longer but curious to hear what others think about this.

Thanks.
I guess it all could be much worse. | They could be warming up my hearse.

jminv
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Re: PEMEX (Petróleos Mexicanos) Bonds --- investment grade --- nice yield

Post by jminv » Fri Jun 14, 2019 6:34 pm

7eight9 wrote:
Fri Jun 14, 2019 5:40 pm
I was sitting around today thinking that maybe there is a way that we can get a little better yield on the fixed income side. Our portfolio is roughly 2/3 cash/CDs/money market.

viewtopic.php?f=1&t=281420&p=4551153#p4551153

PEMEX sparked my interest. A quasi-governmental oil company whose bonds are investment grade (not by much). So I dipped my toe in and bought some 5.375% 03/13/2022 (CUSIP 71654QCE0). It has a 4.8% YTM. So less than three years to go - double what a CD would pay. I was kind of interested in going out a little bit longer but curious to hear what others think about this.

Thanks.
Pemex the company has junk ratings with 2/3 rating agencies and they continue dropping.

How did you go from being in CDs and money market to junk bonds (only Moody’s still has them as investment grade and that will likely change in near future). And in particular one single bond instead of an index? These type of bonds are far from risk free and have a relatively high risk of eventual default. The Pemex ones keep getting downgraded because there are real risks with them. Three years is long enough to have a default, haircut, etc. Buy a junk bond fund if this is what you want since at least then you’ll benefit from diversification. I don’t understand suddenly buying bonds of a bloated and inefficient company with huge liabilities.

You’re too focused on yield instead of total return. But if you want to focus on yield, use diversification.
Last edited by jminv on Fri Jun 14, 2019 6:46 pm, edited 1 time in total.

bberris
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Re: PEMEX (Petróleos Mexicanos) Bonds --- investment grade --- nice yield

Post by bberris » Fri Jun 14, 2019 6:36 pm

Take your risk in equities, take your safety in bonds. As bond rating gets lower, the correlation with stock returns increases. So you are not getting the risk reduction from your bonds; the only incentive for investing in them is risk reduction since the expected return is lower.

Topic Author
7eight9
Posts: 125
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Re: PEMEX (Petróleos Mexicanos) Bonds --- investment grade --- nice yield

Post by 7eight9 » Fri Jun 14, 2019 6:50 pm

I guess my thesis is that there is an implied governmental guarantee. Which makes these bonds better than they would be otherwise.

“The credit is very difficult. Everyone is doing it because it is owned by the Mexican government. Mexico would never not support it,” said a second senior banker of the government’s implicit guarantee of the company’s finances.
https://www.reuters.com/article/pemex-l ... SL2N22R1HJ

Other than TIPs the only other bonds we have (other than a few stragglers) are VWEHX (Vanguard High-Yield Corporate Fund Investor Shares). I remember Michael Milken saying that junk bonds offered better risk adjusted returns than investment grade bonds. I'm not sure where I heard or read this (or if it is even true) but it is something that has stuck in my head for a long time.
I guess it all could be much worse. | They could be warming up my hearse.

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arcticpineapplecorp.
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Re: PEMEX (Petróleos Mexicanos) Bonds --- investment grade --- nice yield

Post by arcticpineapplecorp. » Fri Jun 14, 2019 7:05 pm

7eight9 wrote:
Fri Jun 14, 2019 6:50 pm
I guess my thesis is that there is an implied governmental guarantee. Which makes these bonds better than they would be otherwise.

“The credit is very difficult. Everyone is doing it because it is owned by the Mexican government. Mexico would never not support it,” said a second senior banker of the government’s implicit guarantee of the company’s finances.
https://www.reuters.com/article/pemex-l ... SL2N22R1HJ

Other than TIPs the only other bonds we have (other than a few stragglers) are VWEHX (Vanguard High-Yield Corporate Fund Investor Shares). I remember Michael Milken saying that junk bonds offered better risk adjusted returns than investment grade bonds. I'm not sure where I heard or read this (or if it is even true) but it is something that has stuck in my head for a long time.
you want to take advice from Michael Milken? You do realize he spent 10 years in prison, was fined $600 million and permanently barred by the SEC:

https://www.google.com/search?client=fi ... es+to+jail

I know nothing about this specific deal other than there's an old saying, “More money has been lost reaching for yield than at the point of a gun.” – Raymond DeVoe Jr.

What happens to your investment by the way if the peso loses value relative to the U.S. dollar?

That's never happened before, right?

https://en.wikipedia.org/wiki/Mexican_peso_crisis
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

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Tycoon
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Re: PEMEX (Petróleos Mexicanos) Bonds --- investment grade --- nice yield

Post by Tycoon » Fri Jun 14, 2019 7:07 pm

Look into Argentine or Venezula's bonds for greater yield.
Emotionless, prognostication free investing. Ignoring the noise and economists since 1979. I see the world as it is; not how I wish it to be.

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asset_chaos
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Re: PEMEX (Petróleos Mexicanos) Bonds --- investment grade --- nice yield

Post by asset_chaos » Sat Jun 15, 2019 3:45 am

Getting a higher yield for taking on more risk is trivial. That's why every day there's a spread of yields at the same term from the safest treasuries to the junkiest of junk. I know nothing specific of pemex's yankee bonds, but if the market thought pemex safer, pemex would be able to borrow at a lower rate. The bond market thinks that the yield to maturity at which you bought the bond (minus whatever spread was paid to purchase) is appropriate for the level of risk of the borrowing company. Unless you have a different---and ultimately more correct---view on the riskiness of pemex as a borrower, then you're receiving a fair reward for the level of risk you bear, but nothing more.

Will the risk show up while your hold this particular loan? Who knows. If it's investment grade, the odds of default are non-zero but not ridiculously high. But recall, Enron and Lehman Brothers had high credit ratings on their bonds---up to their declaring bankruptcy. The salient risk to you might be that no risk consequences happen to appear while you hold this bond, and you form the erroneous opinion that the credit risk didn't really exist in the first place. Can you afford the consequences if the risk shows up?
Regards, | | Guy

minimalistmarc
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Re: PEMEX (Petróleos Mexicanos) Bonds --- investment grade --- nice yield

Post by minimalistmarc » Sat Jun 15, 2019 5:15 am

In the U.K. I have an allocation to P2P for diversity and some awesome tax breaks.

I recently put money into an SME loan backed by a first charge on an unencumbered residential property with an LTV of 13%. Amortising loan over 4 years , interest 16% APR.

I’m not reaching for yield but this seemed like a great deal to me. Will report back after first year if it all goes to the dogs!

Valuethinker
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Re: PEMEX (Petróleos Mexicanos) Bonds --- investment grade --- nice yield

Post by Valuethinker » Sat Jun 15, 2019 5:25 am

7eight9 wrote:
Fri Jun 14, 2019 5:40 pm
I was sitting around today thinking that maybe there is a way that we can get a little better yield on the fixed income side. Our portfolio is roughly 2/3 cash/CDs/money market.

viewtopic.php?f=1&t=281420&p=4551153#p4551153

PEMEX sparked my interest. A quasi-governmental oil company whose bonds are investment grade (not by much). So I dipped my toe in and bought some 5.375% 03/13/2022 (CUSIP 71654QCE0). It has a 4.8% YTM. So less than three years to go - double what a CD would pay. I was kind of interested in going out a little bit longer but curious to hear what others think about this.

Thanks.
Junk rating.

The market is not your friend in this.

The rule post GFC and Greece is that bondholders take haircuts. They knew the risks and received premium yield so when it goes wrong they take haircuts.

Mexico was at risk of a horrible trade war e USA which would kill the maquiadora plants and really hurt the economy.

And the price of oil has some frightening dips.

And the denationslisation agreed by previous government is being reversed. And Pemex is a famous mess of a company used to employ political cronies etc.

Why not just buy the Mexican stock market? Last I looked over a 3 per cent yield?

JTColton
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Joined: Wed Jun 20, 2018 7:41 pm

Re: PEMEX (Petróleos Mexicanos) Bonds --- investment grade --- nice yield

Post by JTColton » Sat Jun 15, 2019 6:46 am

Mexico's oil output has been falling for about 15 years and with current politics there what they are, not a very safe place for money.

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