Foreign flows into Mexican fixed income posted a slight recovery in April after the risk-off episode in March. Foreign investors increased their holdings by USD0.18bn, driven mainly by renewed inflows into Udibonos (USD0.34bn), together with modest inflows into Mbonos (USD0.03bn) and Bondes (USD0.01bn). Meanwhile, Cetes recorded outflows of USD0.20bn. Overall, these movements only partially offset the outflows registered in the previous month. However, the rebound across broader EM fixed income markets was considerably stronger: according to IIF data, EM debt markets recorded total inflows of USD51.9bn in April.
On a year-to-date basis, despite the March sell-off, foreign investors still recorded net inflows of c.USD2.72bn into Mexican sovereign bonds, while offshore participation in sovereign debt stands at 11.5% of the outstanding.
Flows were mixed on the domestic front. Pension funds increased their holdings by USD5.92bn, mainly through purchases of Mbonos (USD3.33bn) and Udibonos (USD2.45bn), with smaller additions to Cetes (USD0.80bn). The remaining investor groups recorded net sales in April. Other local investors posted outflows of USD3.19bn, mainly from Mbonos (USD4.24bn) and Udibonos (USD1.31bn), although they increased their holdings of Bondes and Cetes. Some of the outflows from other local investors can be explained by a reduction in repo operations with Banxico (-USD3.3bn), which suggests less demand for defensive liquidity positions after the volatility observed in March. Local mutual funds and banks also recorded net sales of USD0.32bn and USD0.29bn, respectively. Of particular note, both segments significantly reduced their positions in Cetes, partially offset by purchases of Udibonos, while banks also recorded strong inflows into Mbonos (USD4.61bn).
In equities, foreign investors also regained some appetite for Mexican assets. After outflows of USD1.28bn in March, foreigners added by USD0.375bn to their equity positions in April.
Although geopolitical tensions prevail, market reactions may continue to be more measured than during the initial shock observed in March. Nevertheless, a more sustained recovery in foreign appetite will likely require a great deal more clarity about the inflation outlook and the potential impact of disruptions in global energy markets. For now, markets are likely to continue pricing in a prolonged pause in terms of monetary easing by both Banxico and the Fed, which could limit the pace of recovery in flows into emerging market assets, including Mexico.