The instruments in dollars present a yield of 4.6% in the last three months, almost two percentage points more than the Latin American average
President Andrés Manuel López Obrador was elected with a leftist agenda to defend the poor. But, to the surprise of many, during the pandemic, he has done more to defend bondholders.
The austerity imposed when COVID-19 devastated the economy has come at a social cost, but it has boosted bonds. Dollar instruments have returned 4.6 percent in the last three months, almost two percentage points more than the Latin American average.
Mexican Bonds are now trading near their highest level since February, and they may continue to rise, said Shamaila Khan, director of emerging markets debt at AllianceBernstein in New York.
Mexico’s spending figures are in stark contrast to its regional peers. The government has spent just 0.7 percent of Gross Domestic Product to combat the economic impact of COVID-19, compared to more than 8 percent in both Brazil and Chile, according to the International Monetary Fund. That has weighed on the economic rebound amid growing poverty and homicide rates near record highs, but it leaves Mexico with one of the lowest debt burdens in Latin America.
The rebound in bonds “draws a lot of attention,” said Claudia Ceja, a strategist at BBVA in Mexico City. “The indebtedness in Mexico as a result of the crisis has been lower than other emerging market countries.”
That, combined with a takeoff in growth in the United States and declining political risk after the June legislative elections, has helped boost Mexico’s benchmark dollar bonds over the past six weeks. However, after the high volatility of US Treasuries earlier in the year, the bonds still have a way to go to recoup the losses recorded during the first three months of 2021.
The ‘push’ from the United States
Mexico’s economic recovery is lagging behind its peers. GDP rose just 0.8 percent in the first quarter of 2021 compared to the previous quarter, while Brazil’s expanded 1.2 percent; that of Colombia, 2.9 percent; and that of Chile, 3.2 percent.
However, Ceja said that a reopening process and a potential economic boom in the US, Mexico’s largest trading partner, will help the economy catch up in the second half of the year.
Analysts surveyed by Citibanamex expect Mexico’s gross domestic product to expand 5.9 percent this year, above the 5.3 percent expected in Brazil, but still below the 8 percent forecast by analysts in Chile.
Mexican bondholders are also benefiting from a new twist in the saga: Despite austerity, López Obrador remains very popular. While other nations such as Colombia and South Africa have been rocked by civil unrest, refocusing investors’ attention on political risks, the latest opinion polls show López Obrador with an approval rating of 56 percent. .
As risks diminish, spreads on instruments with maturities equivalent to Treasuries have fallen this year to 154 basis points, well below the high near the start of the pandemic of 438 basis points.
AllianceBernstein’s Khan commented that it remains positive on Mexican bonds as positive-effect factors continue.
“Too much risk was discounted in Mexican assets,” he said in an interview. “AMLO has proven to be fiscally responsible during the pandemic, being one of the few countries that have done so.”
This week, dollar bonds have risen, even as their peso-denominated counterparts cut last week’s gains. For its part, the majority of corporate bonds fell.
Investors will be on the lookout for the next biweekly inflation report, to be released on Thursday, July 22, to determine whether Banco de México will continue to raise its rate or adopt an intermittent approach. Next week, Mexico will also release figures for international reserves and retail sales