In this publication, we provide our general view and suggest some corporate bond investment ideas during a time of trade wars. LatAm corporate bonds have been affected by US tariff rhetoric. Mexico’s corporate bond spreads were evidently on an upward trend since 4Q24, in contrast with its South American peers. It is worth noting that during 4Q24 and 1Q25, Andean corporate bonds’ average OAS (option-adjusted spreads) have performed better than those of Mexico, according to our calculations. Last, there is spread widening in some Brazilian corporate bonds in line with US hard-commodity tariffs (e.g. steel and aluminium) and potential US retaliatory tariffs.
Some sectors also appear to be more impacted than others. According to our calculations, during the last six months, the worst performers have been commodity producers (basic materials and mining) and export-related companies like auto-part manufacturers. In sectors like utilities, consumption, energy and banks (senior unsecured bonds), spread performance remains stable. In terms of OAS by credit rating, we have seen a correction and more volatility in the BB space compared to BBB (and A). The average spread widening in the BB space has been c. 40bp from November 2024 to mid-March 2025, followed by less than 25bp spread widening in the BBB space, according to our calculations. In this sense, we calculate that the difference between the BB and the BBB rated bonds is in a widening trend compared to the six-month average at 144bp. We believe the spread widening is in line with the potential negative effects of the trade wars and the lower expected growth in some LatAm countries mentioned by a number of economists and credit rating agencies.
How do we suggest playing corporate bonds in this environment? i) In the short end, we support some tactical trades of Mexican corporate bonds. Bonds that trade at a discount to par (or next to call) and with yields trading higher than South American peers, but where we also believe fundamentals are strong enough to hold in the short term despite all the negative catalysts surrounding them, e.g. ORBIA 26s, ALSEA 26s, CEMEX 5 1/8 PERP (call 26) and MEXCAT 26s. ii) Despite the trade wars, recent earnings have shown signs of improvement in CSN, NEXA and SQM. This can be capitalised in CSN 28s, 30s and 31s, NEXA 34s and SQM 24s, for example. iii) The application of tariffs could undermine company results, but some companies are already looking at ways to mitigate the impact. Our view is that tariffs would have a limited impact on Nemak and FUNO credit fundamentals, e.g. NEMAK 31s and FUNO 30s, 32s and 34s. iv) For investors who prefer to remain on the sideline of the trade wars, we suggest sectors like electricity generation (utilities), particularly in Chile and Peru, in bonds like KALLPA 32s or AES ANDES 32s, or consumption bonds like FALABELLA 32s or LIVERPOOL 32s. In Mexico, we suggest investing in CFE and independent producer bonds since CFE is the off-taker of most of the electricity producers.