The outlook for Mexican peso-denominated bonds depends on whether you believe the economists or the traders.
Most economists anticipate that the country’s central bank will resist the temptation to raise interest rates until at least February, and policymakers are betting that a jump in inflation will be fleeting, according to the latest Citibanamex survey. . That would be good for peso-backed government bonds, whose prices have rebounded from March lows with a moderate outlook.
However, swap traders disagree. They increasingly discount that rate hikes will begin in August, kicking off a cycle of tightening monetary policy to keep prices in check as Mexico recovers from the deepest recession in nearly a century. If right, that could mean more pain for bondholders.
These views show the high uncertainty facing the outlook in Mexico just as its bonds are slowly recovering from a steep decline earlier this year, when investors pulled out en masse. While government bonds in pesos, known as Mbonos, posted a 0.5% gain this month, they have still lost 4.6% so far this year, the sixth worst performance among local currency-denominated sovereign debt in emerging markets. .
“It seems to me that the probability that rates will rise earlier than we thought is high, considering the recent inflation trend,” said Claudia Ceja, a strategist at BBVA in Mexico City. “Even so, I would think they are trying to hold out as long as possible.”
Speculation that the central bank will accelerate its rate hike plans has intensified in swap markets since a gauge of consumer price inflation rose 6% in April from a year earlier, twice as fast as the previous year. goal of 3% of the authorities.
Irene Espinosa, deputy governor of Banxico and one of the five members of the rate-setting board, said in an interview with Bloomberg News on Tuesday that there is no more monetary easing on the table and that the bank may need to eventually withdraw the stimulus if they are inflationary pressures remain high.
Some economists are aligning their outlook more closely with swap traders. In a note last week, JPMorgan Chase strategists Gabriel Lozano and Steven Palacio wrote that Banxico will likely increase the key credit rate, currently set at 4%, to 4.5% this year and 5% in 2022.
The outlook depends in part on the Federal Reserve, which is also balancing inflation risks with the recovery of the US economy after the pandemic. The sudden spike in growth in the United States helped fuel the exodus of investors from Mexico earlier this year when Treasury bond yields surged and moved cash to the United States.
As the Fed promises to continue to support the economy, and Treasury bond yields retreat from March highs, that capital flight has stopped. The 20-day moving average of external flows to Mexican bonds this month turned positive for the first time since mid-February, according to data from Banxico.
If the risks turn out to be temporary and the Fed remains accommodative, Mexico’s central bank can withstand the hikes much longer.
“It depends on what happens to inflation in the coming months,” said Marco Oviedo, an economist at Barclays in New York.
“We would have to see a very atypical behavior in some underlying prices for inflation to start to skyrocket,” he said. “The risk is that the Fed at some point feels like it is behind the curve.”
WHAT TO SEE
Next week, all eyes will be on the biweekly consumer price indices that are expected to show a moderation in inflation in the weeks through May 15. Price data for the coming months will be particularly important to assess whether the inflation spikes are temporary or if they are likely to prompt the Mexican central bank to accelerate the rate hike. The minutes of the Banxico meeting decision are scheduled for Thursday.
Mexico will report the final figures for the gross domestic product for the first quarter, economic activity and the trade balance for April. Next the complete list:
May 24: Inflation
May 25: Trade balance, current account, international reserves
May 26: GDP, economic activity
May 27: Unemployment rate, central bank monetary policy minutes
May 28: Budget
BOND SALES:
Vanrenta requests sale of 400 million pesos in local bonds on May 25
Grupo Bimbo requests a debt quota of 20,000 million pesos
