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Mexico’s local debt may see more gains after hitting bottom last month, as Expectations of aggressive easing offset three sovereign rating cuts and falling oil prices.
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Analysts and investors from JPMorgan Chase & Co. to Emso Asset Management say Mbonos will get a boost as Banxico aggressively pushes rates to fend off what could be the most severe recession in three decades. The beaten dollar bonds sold by Petróleos Mexicanos, the world’s most indebted major oil company, could also advance, albeit for different reasons.
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While Mexico’s President Andrés Manuel López Obrador is unmoved by the stimulus, Banxico unexpectedly cut rates by 50 basis points on Tuesday. The move raised the Mbonos, whose yields fell as much as 25 basis points. Citigroup Inc. expects another half percentage point cut next month and says rates will end the year at 4.5%. JPMorgan Chase & Co. says rates could drop to a record 3% even in the third quarter.
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“The market is increasingly valuing the most powerful shares of the central bank, as it seems to be the only show in town given AMLO’s continued fiscal discipline“Says Jens Nystedt, a money manager at Emso in New York. Lower rates “will support the entire curve.”
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The downgrade of Mexico’s credit rating caused its dollar bonds to drop and contributed to a peso drop of almost 23% in 2020, making it the third worst currency in the world after the South African rand and the Brazilian real. However, This year’s recession is likely to be so severe that few are forecasting an increase in inflation, the usual consequence of a falling currency.. Consumer prices are now rising near their slowest pace since 2015.
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Analysts, on average, expect the economy to contract 6.7% this year, beating the 4.7% drop in 2009, according to a poll released Tuesday. Bank of America Corp. says the drop may reach 8% and Citigroup forecasts a 9% contraction, the worst year since at least 1989.
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Pemex bonds, meanwhile, have fallen so much, so fast, that investors are betting on a rally despite the global oil market crisis that sent Brent crude down 25% this week. The company’s bonds pay 6.8 percentage points in yield above their sovereign counterparts, down from a high of 8.7 percentage points at the beginning of the year, but still enough to attract investors.
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Pemex has covered this year’s production around an oil price of USD 49 per barrel and projects an unexpected profit of USD 6,000 million from insurance. On Friday, Moody’s Investors Service downgraded its Pemex rating by two levels, even deeper into garbage territory, underscoring the challenge of paying more than $ 100 billion in debt.
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Some analysts, including AllianceBernstein’s emerging markets debt chief, Shamaila Khan, say government support means that Pemex will not face liquidity problems.
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“Storage problems will cause weakness in the short term, but assuming a recovery in activity as closures decrease, in addition to supply cuts, there will be a recovery.”he said in an interview from New York. “We are constructive about Pemex at current levels.”
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Despite last week’s downgrade, few analysts are eager to exit as bearish investors have already cut their losses amid deepening oil declines. That suggests that Pemex’s future outflows will likely be more moderate than previous expectations.
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At Aberdeen Asset Management, money manager Edwin Gutiérrez says he is now underweight in Mexican sovereign debt and overweight Pemex.
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“My conviction is that Pemex should be close to the sovereign, since the sovereign must continue to support Pemex”, said.
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