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This week was undoubtedly good for Mexico, which eluded economic calamity by winning a month-long pause in US President Donald Trump’s 25% import tariffs. The path ahead is murky, as Mexico’s already sluggish economy is set to underperform even if the government does assuage all of Trump’s concerns on the flow of migrants and drugs. But several bond investors told LatinFinance they are either bullish on Mexico or less pessimistic than they were previously, saying the detente shows President Claudia Sheinbaum can artfully handle relations with Trump and keep the economy on track. Mexico’s sovereign bonds never fully reflected the risks of a trade war, which markets view as unlikely given the co-dependence between the US and Mexican economies, lopsided as it may be. But there’s still room for improvement in prices, according to some investors, who say lingering worries over the country’s prospects seem to be overdone. “The overall picture remains constructive,” said Alexis de Mones, portfolio manager at Ashmore Group, citing the “quality of policy making we’ve seen from Claudia Sheinbaum.” The country will offer a “very good investment opportunity,” said Carlos Carranza, portfolio manager for emerging markets debt at Allianz Global Investors, who noted investments in Mexico did well during Trump’s first term in office despite all the political noise. A still-strong US economy should provide a lift to Mexico given the two countries’ strong linkages, he said, and Sheinbaum’s ability to de-escalate tensions offer an opportunity. “Investors will have to navigate volatility along any asset class in Mexico,” Carranza said. “But if I had to say which one is better positioned for delivering positive returns in the next six months, it’s Mexico sovereign bonds.” TROUBLE AHEAD? This week’s news helped strengthen the peso, which sold off after last year’s general election, when Mexican voters overwhelmingly favored Sheinbaum and her predecessor Andrés Manuel López Obrador’s Morena party. The scale of the party’s electoral victory facilitated the implementation of constitutional changes, including judicial reforms that some worry could erode protections for foreign investors. But given this week’s moves in the local currency and other Mexican assets weren’t too dramatic, it begs the question: Is there more trouble ahead? Investors give credit to Sheinbaum ability to help reassure Trump by sending thousands of National Guard members to the border and taking action against drug traffickers. That, at least for now, avoided tariffs on hundreds of billions of dollars of goods that some economists say would’ve tipped Mexico into a recession. One worry is that fully allaying Trump’s concerns may take much longer than a month. “These are systemic problems that are really hard to solve, especially in a condensed timeline,” said Katrina Butt, portfolio manager for emerging market debt at AllianceBernstein. She says she’s “much more cautious” on Mexican government bonds than those of local corporates or Pemex, the state-owned oil firm whose finances continue to be a drag on the sovereign. While Sheinbaum’s support for Pemex is welcome news to the company’s creditors, it’s less positive for the public finances and sovereign bondholders. BUYING DEMAND The tariff reprieve has helped drive issuance by Mexican corporates. Power generator and distributor Saavi Energía sold some $1.1 billion in bonds this week, while mining firm Minera Mexico and the Mexican subsidiary of Spain’s BBVA bank raised $1 billion each . The eleventh-hour deal also prevented tariffs putting a “nail in the coffin of the nearshoring story,” said Christine Reed, portfolio manager for emerging markets local currencies at investment firm Ninety One. The number of global corporations opening up shop in Mexico due to its proximity to the US hasn’t been overwhelming, but trade tensions put any momentum at risk. If the trade situation does deteriorate, Mexico’s economy could suffer and put the country at risk of losing its investment grade status from ratings agencies, Reed said. The postponing of tariffs “decreases the chances that we see imminent rating downgrades,” she said, lowering the chances of capital outflows that would result in funds moving money away from Mexico and toward safer assets. “There’s a lot of money parked in Mexico because of its high credit rating,” she said. While Reed remains somewhat cautious on Mexico sovereign bonds, she noted their higher returns compared to US Treasuries offer an “attractive buffer.” Plus, now that consumer prices aren’t rising as quickly, the difference between inflation and Mexican interest rates has put real rates “higher than they have been for an extraordinarily long period of time,” Reed said. RATE CUTS The Trump-Sheinbaum trade deal and slower Mexican inflation gave the central bank room to accelerate monetary policy easing, with a 50 basis point reduction this week, compared with 25 basis point cuts at the previous four meetings. The bank’s overnight rate now stands at 9.5%. Mexico’s sovereign debt, both external and peso-denominated, continues “to screen as attractive” and compensate investors for risks, said Michael Henry, portfolio manager on Wellington’s emerging markets debt team. In its policy statement, Banxico noted the “weakness of the Mexican economy intensified” at the end of last year. While inflation hasn’t been fully quelled, the bank foresees continued softening toward Mexico’s 3% target, which it said will let it “continue the rate-cutting cycle.” Mexico’s dollar-denominated debt is “boring, uninteresting,” since it hasn’t moved much in recent months, said Eric Fine, head of active emerging markets debt at VanEck. But he’s getting more interested in the country’s local bonds, where he was “severely underweight” last year but is now getting closer to neutral. After this week, the odds are “a lot higher” that Sheinbaum can deliver the types of concessions Trump wants and avoid punitive tariffs, Fine said. “If that’s the case, then it’s a really good environment, particularly for Mexican local currency debt,” he said.
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