Foreign 'hot money' in Mexican debt rises for second month

Foreign investors expanded their stake in Mexican federal government debt for the second month running in May, according to data from the Bank of Mexico (Banxico). These lenders concluded the month holding $104.446 billion in government securities, including Bonos M, Cetes, Udibonos, and Bondes.

This portfolio investment, often referred to as 'hot money,' experienced a marginal monthly increase of 0.2%, equivalent to $252 million. This follows a 3% rise in April, after a 5.5% decrease in March when peso-to-dollar conversions were made using the FIX exchange rate.

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This provoked an upward adjustment in swap rates and reflected that the market began to discount greater inflationary pressures and possible increases toward the close of the year.

Analysts at Monex, Janneth Quiroz and André Maurin, noted that Banxico's decision to reduce the benchmark interest rate from 6.75% to 6.50% and suggest the end of its rate-cutting cycle influenced foreign holdings. They explained that this move led to an upward adjustment in swap rates, indicating the market began pricing in higher inflationary pressures and potential increases toward the year's end.

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In the medium term, the interest rate differential between Mexico and the United States will remain the main support for the demand for foreign capital.

The May data confirms a notable shift in foreign flows towards shorter-duration assets, despite the slight overall increase, the Monex analysts added. They believe the market dynamics reflect a persistent international caution towards geopolitical uncertainty and a preference for safe-haven assets. In the medium term, the interest rate differential between Mexico and the United States will continue to be the primary driver for foreign capital demand, they estimated.

Foreign holdings will depend on the stability of this rate difference compared to the U.S. Federal Reserve, as Banxico has concluded its cycle of cuts. The analysts pointed out that Banxico's commitment to monetary policy stability could boost the attractiveness of carry trade strategies using pesos, aligning with the observed increase in foreign Cetes holdings.

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Banxico's commitment to the stability of monetary policy could boost the attractiveness of carry trade strategies with pesos, consistent with the increase in foreign holdings of Cetes.