Nomura sees risk of Mexican bond sell-off by funds

MEXICO CITY : Nomura analysts said on Wednesday that a sell-off of Mexican peso-denominated bonds could gain pace and that potential U.S anti-trade policies could drive yields back near levels seen during the global financial crisis.

In a client note, Nomura said that data showed foreign funds had been selling Mexican peso bonds since the surprise Nov. 8 election of Donald Trump as U.S. president.

The United States is Mexico’s top trading partner; Trump threatened to curtail trade with Mexico during the campaign.

So far, local pension funds appear to be picking up longer-dated Mexican peso debt, Nomura said. But since foreigners hold about four times more peso bonds than local pension funds, local buyers may not be able to keep up purchases for long.

“The risk of a sharp sell-off in the long end of the curve remains latent in the case that compensating local purchases reach its limits,” Nomura analysts Mario Robles and David Wagner wrote.

The yield on Mexico’s benchmark 10-year bond has surged more than 100 basis points since the U.S. election, and the spread between the bond and its U.S. equivalent has widened to around 490 basis points.

Nomura said new U.S. trade policies could end up changing the outlook on Mexico’s exchange rate and growth prospects. Such developments, as well as other global risks, like unpredictable euro zone elections, could spur more selling of Mexican bonds.

Nomura said the U.S.-Mexico 10-year spread could blow out toward the 785 basis points seen during the 2008-2009 global financial crisis.

“The uncertainty on the final shape of U.S. policy could still put a strain on this spread, maybe to levels not as high as the global financial crisis period, but nevertheless, at higher levels than currently,” analysts said.