By Abraham Gonzalez
MEXICO CITY (Reuters) - Dimming prospects for economic growth in Mexico are prompting local pension funds to shift their $194 billion holdings faster than ever to what they see as a safe bet: government bonds.
Over the 12 months through June, Mexican pension funds invested eight times more in Mexican debt than they had in the July 2017-June 2018 fiscal period, a record increase in the rate of bond purchases, data from pensions regulator Consar show.
Purchases of government bonds in the year through June surged by 377.9 billion pesos ($19.9 billion). That put the total invested in bonds at 1.99 trillion pesos, or nearly 54% of their portfolios. Twelve months earlier, the proportion invested in bonds was 48.5%.
That is the highest level of bond investment since September 2016, when Mexico's central bank began hiking its key interest rate and a stock market rally started to cool.
Bonds are traditionally seen as less risky investments than stocks, at least in the short term. They offer a fixed return that is more stable, especially in times of economic volatility.
However, the shift toward less-risky sovereign debt could mean lower returns for workers' retirement pots.
"Pension funds adjust their portfolios at different stages of the economic cycle," said Andres Moreno Arias, director of investments at the pension fund SURA. "In deceleration phases, usually the best performing assets are fixed-rate bonds."
As investment in bonds surges, pension funds are moving out of stocks. Mexico's benchmark stock index (MXX), which has shed 16% since President Andres Manuel Lopez Obrador was elected on July 1, 2018, slid close to a five-year low on Friday.
Pension funds' investment in Mexican and international stocks fell to 18% of their total portfolios in June, down from 22.5% at the same point last year, according to Consar figures.
Analysts expected the trend to intensify if Mexico continues to face the risk of deterioration in its sovereign debt rating and the credit rating of state oil firm Pemex.
Mexico's economic worries are mounting.
Gross domestic product advanced just 0.1% in the April-June period from the previous quarter, according to preliminary data. Meanwhile, a central bank poll showed that private sector analysts have now cut their 2019 growth forecast to 0.80%.
Despite the anemic growth, Mexico offers investors plenty of incentive to invest in its sovereign debt, generally viewed as a much safer bet than corporate securities.
The Bank of Mexico lifted its key interest rate to 8.25% on Dec. 20 and has not cut borrowing costs since 2014. That has helped to provide global investors with some of the best rates of return among the G20 group of major economies.
Since the rate hike, demand for debt has helped pushed down the yield on Mexico's 10-year bond 128 basis points to 7.45%, Refinitiv data show. By contrast, the U.S. 10-year bond (US10YT=RR) pays a yield of 1.85%.
"The forward scenario is complex," said Jorge Sanchez, an economist at Mexico's FUNDEF think tank. "Pension funds may enter a certain panic and continue to increase their debt portfolio and increasingly abandon the (stock) market.
(Reporting Abraham Gonzalez; additional reporting by Noe Torres; writing by Julia Love; Editing by Cynthia Osterman) OLUSECON Reuters US Online Report Economy 20190805T183941+0000