Regional Development and Cross-BorderInfrastructure Finance: Comparing theYield-Spread Determinants of Mexican and U.S. Sub-Sovereign Government Bonds

Abstract

The crafting of innovative mechanisms to fund strategic projects in cross-border regions is acquiring special significance in countries that, like Mexico and the United States, face growing infrastructure needs and tightening public budgets. There is an emerging literature arguing that cross-border mechanisms of bond financing can help attract private capital for strategic infrastructure projects. In this article, the authors consider that while overall financial integration is not a necessary condition for the design of cross-border bonds, higher yield convergence among these instruments can enhance their feasibility. The authors analyze the risk determinants of local government bonds in Mexico and the United States. They find that, although these economies are increasingly interdependent, their sub-national bond markets are structurally different. Although yield spreads in the U.S. reflect the features of the bond and the financial condition of issuers, the observed yield spread in Mexican bonds will largely depend on the gross state product and geographical location of the issuing entity, the face value of the bonds, and their coupon.