In August, foreign investors recorded inflows into Mexican sovereign bonds as Banxico implemented a rate cut, and the Board indicated the possibility of further easing in the future. Foreign inflows totalled nearly USD1.99bn during the month. Breaking down the flows by market, the majority went into Cetes (USD1.50bn) followed by Udibonos (USD0.36bn) and MBonos (USD0.25bn), while there were outflows from Bondes (USD0.12bn).
Nonetheless, YtD, foreigners have recorded outflows from MBonos (USD1.48bn) and Bondes (USD1.61bn), while showing an appetite for Cetes (+USD1.907bn) and Udibonos (+USD1.04bn). Overall, foreign appetite for Mexican sovereign bonds has remained subdued and volatile YtD, with total outflows amounting to USD0.14bn. As such, offshore investors’ share in all government securities has been on a downward trend for nearly a decade. In August 2024, foreign investors held 14% of sovereign bonds, down from around 18.5% three years ago. Their participation in MBonos has also declined over the past few years, currently standing at 28.2%, compared to 41% three years ago. Meanwhile, foreign participation in the Cetes and Udibonos markets has shown a slight upward trend in recent years, currently at around 12% and 5%, respectively.
In terms of local participants, local mutual funds, pension funds, and other investors continue to increase their participation in government securities. In August, other local investors recorded inflows of nearly USD7.63bn, mutual funds USD3.11bn, pension funds USD2.67bn, while banks contributed only USD0.12bn. Other local investors are directing most of their inflows to MBonos and Cetes, mutual funds to Bondes and Cetes, and pension funds to Udibonos. Overall, we emphasise that demand from local investors continues to finance government needs in a context of subdued appetite from foreign investors.
On the other hand, investor flows to Mexican equities recorded total outflows of USD3.84bn in the first eight months of 2024, with -USD1.22bn in August alone. This contrasts with the trend in other emerging markets, where equity inflows have totalled USD24bn from January to August, according to IIF data. As mentioned in previous reports, the sell-off in local assets could be linked to risk aversion driven by expectations of a slowdown, uncertainty surrounding restrictive monetary conditions, structural reforms in Mexico, and the upcoming elections in the U.S.
The Fed will most likely continue its easing cycle beyond this week's meeting to prevent significant deterioration in the labour market, as inflation is expected to gradually converge towards 2%. This, combined with disinflation and the slowdown in Mexico, provides room for Banxico to proceed with rate cuts for the remainder of the year. We continue to see value in the 3-7Y tenors and expect the curve to gradually steepen. However, despite potential gains in both nominal and real curves, heightened risk aversion may keep inflows into local assets subdued.