1. The Mexican Revolution and Consumer
Confidence: Effects on Mexican Bond Prices
Travis Bowen,1 Brian Gendreau 2
1Warrington College of Business Administration, 2Department of Finance Insurance & Real Estate, University of Florida, Gainesville, FL
Conclusion
References
Introduction
Results
Bond prices are an indicator investors perceptions
about a countries stability. When investors have a
postive outlook on the economy they tend to be more
willing to buy and vice versa. Bond prices can also
reflect a countries political stability. One large political
event can sway investor confidence, particularly if
they believe it can affect a companies ability to service
its government and corporate debt.
In Latin America between 1910-1941, there was much
political uproar, including the Mexican Revolution. In
our research we examined the prices of Mexican
government and corporate bonds that traded in the
United States gauge of investors’ reaction to the
Mexican revolution. Specifically, we examined the
reaction of the bond market to four events; (1)The
beginning of the Revolution when Franciso I. Madero
replaced the dictator Porfiro Diaz in 1910; (2)The coup
by general Huerta that deposed the democratically
elected President Madero in 1913; (3)The
deterioration of relations between Mexico and the
United States in April 1914; (4)The interruption of
service on Mexican Government bonds 1915.
Initially, Investors in Mexican Government Bonds do
appear to have been concerned when the dictatorship
of Porirfo Diaz was replaced by a democratically
elected government in the initial stages of the
Mexican Revolution. The bond market initially became
apprehensive after General Huerta deposed President
Madero and relations with the incoming Wilson
administration deteriorated, raising concerns about
the Huerta’s governments ability and willingness to
service Mexico's debt. (The Huerta Government
declared a moratorium on debt service in Dec 1914.)
The markets reaction to Pancho Villa’s raid on
Columbus, NM was profoundly negative. Yield spreasd
widen marketly and accept a period of optimism
during 1918 did not decline again until after the
military phase of the Mexican Revolution. The
evidence indicates the bond market was highly
sensitive to political developments, especially changes
in the U.S.- Mexico relations that were perceived to
have an effect on Mexico’s willingness and ability to
service its sovereign debt.
• Little evidence of negative bond market reaction to
beginning of revolution when Francisco Madero
replaced Porifiro Diaz (1910).This is likely because the
market perceived President Madero to be a liberal
democrat rather than a social revolutionary.
• Spreads on Mexican Government bonds over US
Treasuries began to climb after General Huerta’s coup,
the murder of Francisco Madero, and theWilson
administration’s refusal to recognize the Huerta
government.(1913).
• The largest negative reaction of the market occurred
after PanchoVilla’s on Columbus, New Mexico (March
1916) and General Pershing’s armed intervention in
Mexico.
• The market steadied again in 1918 asWWI-related
production improved Mexico’s economy and finances,
only to deteriorate again.
Approach
We collected government and railroad bond prices
from Mexico,The United States, and – a control --
Cuba between 1900-1927. We then searched for
changes in prices, yield spreads over U.S.Treasuries
and trends in reaction to each of the major events in
the Mexican Revolution.
• As negotiations for resumption of Mexico’s debt
service and a new loan fell through
• Spreads declined on trend as the military phase of the
Mexican Revolution ended (1920).
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Yield Spreads over U.S.Treasuries on Mexican Government Bonds
Joseph, G. M., and Jürgen Buchenau. Mexico's Once
and Future Revolution: Social Upheaval and the
Challenge of Rule since the Late Nineteenth Century.
Print.
Turlington, EdgarWillis. Mexico and Her Foreign
Creditors. NewYork: Columbia UP, 1930. Print.