Mexico Bond Auction Sells Less Than 70% : Debt: Sluggish performance at weekly <i> tesobono</i> sale is blamed on doubts over bailout plan.

In what has become a weekly test of investor confidence in Mexico, investors bought just $275.3 million of the $400 million in dollar-backed bonds offered--at sharply higher interest rates than the central bank paid last week.

Despite the higher interest rates for the government securities called which will ripple through the economy because most mortgages and other loans are pegged to those rates, the stock market remained stable.

The Mexican Stock Exchange Index closed up 27.12 points--1.31%--at 2,095.61, mainly on expectations that a $40-billion loan guarantee program will pass Congress by next week, analysts said.

The peso, however, showed continued weakness. After opening at 5.77 to the dollar, it dropped as low as 5.85 before the central bank intervened and bought pesos. The battered currency recovered to close at 5.77. It traded at 3.4 to the dollar until Dec. 20, when it was devalued by the government.

“The authorities intervened with half a billion dollars to stabilize the currency,” said Lawrence Goodman, an analyst at Salomon Bros. “This indicates the heightened pressures on foreign exchange markets caused by the tesobono issue.”

In Washington, the debate will heat up today as the House Banking Committee holds hearings on the White House proposal to offer up to $40 billion in loan guarantees to stabilize Mexico’s economy. The Senate Foreign Relations Committee is holding a hearing on Thursday.

While leaders in both parties offered conflicting accounts of the bailout’s chance of passage, potential Republican presidential candidate Jack Kemp called for the resignation of International Monetary Fund Managing Director Michel Camdessus, charging that he had played a lead role in fostering Mexico’s financial crisis.

He also called on Congress to investigate the extent to which the Treasury Department and the Federal Reserve played a role in encouraging Mexico to devalue the peso.

The weekly auctions of tesobonos have become a focus of Mexico’s economic drama because at the time of the peso’s plunge, foreign investors held about 80% of the bonds then outstanding. Their confidence in the government’s ability to pay the debts eroded with the currency’s value, now about 40% lower than in December.

As the tesobonos matured, investors took their money and fled, rather than reinvesting in new issues of the bonds. The government had to draw on its already beleaguered foreign reserves to pay the erstwhile investors.

The positive news from Tuesday’s auction, Goodman added, is that it “indicates the government is willing to issue bonds at market rates.”

Besides offering higher interest rates--an average of 26.99% for six-month bonds--the Bank of Mexico had attempted to create demand for the new issue by removing tesobonos from the market on Monday, allowing Mexican banks and brokerages to use $1.4 billion of the bonds to cancel debt owed the central bank.

A similar move last week contributed to a successful auction of $400 million worth of tesobonos. That outcome--on the heels of the promise of a U.S. rescue plan--was seen as a sign of restored investor confidence after the government had managed to sell just 10% of the bonds it offered a week earlier.

This week, the government accepted interest rates averaging 24.98% for 91-day bonds and 26.99% for six-month bonds. Even so, neither offer was fully subscribed.

In contrast, all $50 million of the one-year tesobonos were placed at an interest rate of 21.4%. The government could have placed $97 million more of the longer-term bonds at interest rates of up to 28%, but did not.

“That shows they have some flexibility,” said Goodman.