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Glossario

UDIBONOS

Categoria — Obbligazioni Sovrane
By Vladislava Sabanova, Latin America Group of Cbonds
Updated April 1, 2024

What are Udibonos?

Udibonos represent a distinctive category of sovereign financial instruments within the Mexican financial landscape, offering investors an avenue for medium to long-term investment. These bonds are denominated in inflationary investment units (Unidades De Inversión, UDI), and the UDI levels, crucial for determining the value of Udibonos, are calculated based on the 2-week inflation index and 15-day CPI change.

Udibonos are a vital component of the public debt portfolio issued by the Mexican government. Facilitated by the Central Bank of Mexico, these bonds offer a means for the government to raise capital by issuing bonds with real fixed interest rates and contribute to the liquidity of the financial market, thus providing an avenue for both domestic and foreign investors to participate in the country’s debt market. Institutional investors, including pension funds, often find these securities attractive due to their characteristic of offering real returns in the face of inflation. This unique feature makes Udibonos an enticing investment option for those looking to balance risk and returns in their portfolio.

However, it’s important to note that Udibonos, being predominantly long-term instruments, are not immune to market fluctuations. The probability of a sharp correction in the market and potential liquidity problems are inherent risks associated with these bonds. Investors should carefully consider these factors when including Udibonos in their portfolio, understanding that the benefits of stable returns come with the inherent trade-offs associated with longer-term investments in the financial market.

UDIBONOS

Features of Udibonos

  • a par value of 100 UDI
    Such nominal value provides a standardized measure for valuation.

  • issuances spanning 3, 5, 10, and 30 years
    Various periods make Udibonos attractive for medium to long-term investments.

Primary issuance of Udibonos

The primary issuance of Udibonos involves a meticulous process governed by specific rules outlined in Banco de México’s Circular 5/2012. This circular is directed towards credit institutions, brokerage houses, mutual funds, pension funds, and Financiera Rural, detailing the guidelines for participating in the auctions where these government securities are placed.

In these auctions, participants, which include institutional investors and financial entities, submit their bids specifying the desired amount of Udibonos they wish to purchase and the price they are willing to pay, denominated in UDIS.

Particularly noteworthy is the fact that in primary auctions, the federal government may offer securities that were originally issued before the auction date. This introduces a unique dynamic where auctions are conducted at clean prices, devoid of accrued interest. As a result, investors acquiring these securities in the primary market must factor in the accrued interest of the current coupon to the allotted price.

This practice underscores the importance of understanding the nuances of primary issuance for potential investors. The ability to acquire securities at clean prices provides a transparent view of the market value, yet investors need to consider the additional cost associated with accrued interest. This dual consideration enhances the clarity and efficiency of the primary issuance process for Udibonos, ensuring a fair and informed market for both the government and participating investors.

How does inflation affect Udibonos

Inflation has a dual impact on Udibonos, both directly and indirectly, shaping the dynamics of these government securities.

Directly, the influence of inflation is embedded in the use of Unidades De Inversión (UDIs) as the denomination for Udibonos. As a bond tied to UDIs, the price of Udibonos and the interest they yield will increase in tandem with the growth of the UDI, highlighting that the cash flows from Udibonos, expressed in pesos, expand with inflation. Consequently, investing in Udibonos acts as a hedge against the eroding effects of inflation, ensuring that the capital invested retains its value over time.

Indirectly, the impact of inflation is more nuanced and tied to market expectations and analyst forecasts. Market movements are largely influenced by shifts in expectations, and Udibonos’ performance is no exception. If there is an anticipation of higher inflation than previously expected, Udibonos are likely to outperform MBonos, and vice versa. This scenario also applies to surprises in inflation data. If the market had factored in a certain level of inflation, and the observed data surpasses these expectations, resulting in an inflationary surprise, Udibonos tend to fare better than MBonos.

Thus, Udibonos not only directly reflect inflation through their association with UDIs but also respond to market sentiments and expectations regarding inflation. This dual relationship makes Udibonos a dynamic investment option, offering a balance between direct protection against inflation through the UDI and the ability to navigate market dynamics influenced by inflation expectations and surprises.

Example

On January 18, 2001, the Mexican federal government initiated the issuance of Udibonos, exemplifying the characteristics of this type of government security. Let’s consider a specific Udibono issued on this date:

  • Face Value: 100 UDIs

  • Issue Date: January 18, 2001

  • Maturity Date: January 6, 2011

  • Days to Maturity: 3640 days

  • Coupon Rate: 8%

  • Coupon Term: 182 days

Fast forward to February 6, 2001, when the federal government conducted an auction for the Udibonos originally issued on January 18, 2001. The payment date resulting from this auction was February 8, 2001, and at that time, the securities had 3619 days remaining to mature, with 21 days already elapsed for the first coupon payment period. Notably, the auction followed the same protocol as the issuance, with the securities being auctioned at a "clean price," excluding accrued interest. Therefore, the accrued interest for the first coupon had to be added to the allotment price to calculate the results’ payments.

To illustrate, let’s assume an investor participates in the auction, submitting a bid equivalent to an annual yield of 8.25% in UDIS. For example, the bid price presented by the investor for each security they wish to purchase is 98.30596. If the investor receives an allocation, on February 8, 2001, they would need to pay 98.77262 UDIS for each title, considering the accrued interest for the first coupon period (21 days * 8%)/360) and adding it to the bid price. This example showcases the intricacies of Udibono auctions, where investors calculate their bids based on annual yield and adjust for accrued interest to determine the final payment.

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