Bloomberg — Mexico’s beaten-up local bonds are starting to entice bargain hunters amid signs the Ukraine war failed to spur panic selling from foreign investors.
Peso-denominated notes (MXNUSD) are looking cheap as yields hover around multi-year highs, with bonds due 2031 are paying an almost 8.5% rate, the most since 2019, and bonds due 2042 yielding 8.63%, exactly what they were trading three years ago. The so-called Mbonos have been falling since early last year, as prospects of tighter global monetary conditions buoyed U.S. rates and hit appetite for developing-nation assets.
But now there are signs the worst is over. Unlike previous episodes of global market turmoil, the conflict in Eastern Europe didn’t trigger massive capital flights from Mexican local bonds, which are used by foreign investors as a proxy for the emerging-market risk. Overseas money managers sold 3.9 billion pesos ($190 million) worth of Mbonos in the week following Russia’s invasion of Ukraine, which is a fraction of the 61 billion peso one-week outflow seen in the onset of the pandemic in March 2020.
“Long-dated MBonos offer very attractive value for longer-term investors,” said Juan Carlos Alderete Macal, Mexico City-based executive director at Grupo Financiero Banorte. Alderete favors bonds due Nov. 2042 and Nov. 2047, noting their high yields and high spreads to Treasuries. “Mexico stands out as a deep and relatively stable market when compared to Latam peers,” he added.
Foreign investors hold more than 40% of the total 3.4 trillion pesos in Mbonos outstanding, making their portfolio moves big drivers for the local market. Also the notes are particularly sensitive to global events because the peso trades around-the-clock and the Mexican fixed income market is highly liquid when compared to other developing-nation peers.
MBonos are “attractively priced for buy-and-hold investors,” said Kathryn Rooney Vera, the Miami-based head of global macro research at Bulltick LLC. The recent rout in these notes was due to “broad pullback in risk sentiment” and therefore bonds have room to pick up.
Current prices of MBonos “are not in line with Mexican fundamentals,” said Claudia Ceja, a currency and rates strategist at BBVA in Mexico City. She adds prices are reflecting a worse scenario than one in which the nation’s rating is downgraded.
On top of attractive valuations, Mexico’s local bonds are also poised to benefit from the tide of asset reallocation triggered by Ukraine war fallout. Emerging-market investors are ditching Eastern European assets and putting money into relatively safe destinations, including Latin America. Goldman Sachs estimates Mexico’s weight in JPMorgan & Chase’s GBI-EM Global Diversified Index will likely increase by 0.6 to 0.8 percentage point following the exit of Russia from the benchmark.
“A rebalancing of investors’ portfolios across EM ends up benefiting Mexico,” analysts led by Adrian de la Garza, Mexico City-based Chief Economist at Banamex SA, wrote in a note on March 3.
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