WisdomTree

Emerging Market Debt, ETF Education, Fixed Income, Currency & Alternative

Mexico a Better Buy than Germany?

by Rick Harper, Head of Fixed Income & Currency on August 8, 2012

“Let’s see: would I rather own German or Mexican 10-yr bonds? 1.5% or 5.7%? Huge potential debt/GDP or half that of U.S.? Duh.”1

PIMCO’s co-CIO Bill Gross splashed into the headlines with this pithy yet powerful quote. Despite the fact that Mexico’s S&P credit rating is far below Germany’s, we see greater opportunity in Mexican bonds than German bonds for some investors.

As Europe’s piggy bank, Germany will be the single largest creditor in any eurozone-backed bailout. Stagnating GDP growth, rising debt levels and a depreciating currency create a troubling mix, should Europe continue on its current path. In Gross’s own words, “I would be leery of German bunds simply because there are only a few scenarios in which they can do well.”

On the other hand, Mexico has comparatively low levels of debt, higher-yielding bonds and, I believe, significant growth potential. Investors seem to agree. Demand for Mexican bonds—and those of other emerging markets as well—has been growing dramatically2 as individuals look to avoid Europe’s debt crisis.

In fact, our own research and investment process for WisdomTree’s Emerging Markets Local Debt ETF (Ticker: ELD) has led us to the same conclusion. Mexico is currently our largest country allocation, representing 10.27% of the Fund as of June 22, 2012. We’re optimistic that over the next 3–5 years, debt of certain emerging market countries has the potential to provide attractive rates of return.

Find out more about the WisdomTree approach to fixed income.

1Percentages represent yield to maturity of 10-year government bonds from Germany and Mexico, respectively. Source: http://twitter.com/PIMCO/status/215095940695076867, June 19, 2012
2Source: Emerging Market Traders Association, June 14, 2012.

Important Risks Related to this Article

There are risks associated with investing, including possible loss of principal. Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. Investments in emerging, offshore or frontier markets are generally less liquid and less efficient than investments in developed markets and are subject to additional risks, such as risks of adverse governmental regulation and intervention or political developments. Derivative investments can be volatile, and these investments may be less liquid than other securities, and more sensitive to the effects of varied economic conditions. Fixed income investments are subject to interest rate risk; their value will normally decline as interest rates rise. In addition, when interest rates fall, income may decline. Fixed income investments are also subject to credit risk, the risk that the issuer of a bond will fail to pay interest and principal in a timely manner, or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline. Unlike typical exchange-traded funds, there is no index that the Fund attempts to track or replicate. Thus, the ability of the Fund to achieve its objective will depend on the effectiveness of the portfolio manager. Due to the investment strategy of this Fund, it may make higher capital gain distributions than other ETFs. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.

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