NEW YORK, Aug 23 (IFR) - Mexican dollar bonds had a muted response Tuesday to S&P's decision to revise the sovereign's outlook to negative, as investors held tightly to scarce bonds in a strong market.
While the peso and local MBonos weakened in reaction to the rating agency's move, dollar bonds issued by both Mexican corporates and the sovereign barely budged.
"It seems to have affected the currency and MBonos, but dollar corporates are at the same level [as before the S&P decision]," said a New York-based corporate bond trader.
The sovereign's 4.125% 2026s were largely unchanged at around 109.75-110.25, as were the 2022s issued by state-owned oil company Pemex, which were spotted around 104.00-105.25.
Traders were reporting a healthy bid for Mexican corporate paper, as investors continued to pour into emerging markets in their search for yield.
"Mexican corporates have underperformed the rally, so why are you going to sell a scarce asset?" the trader said.
"Try selling Televisa bonds and buying them back at a lower price. Good luck."
S&P said the negative outlook means there is a one-in-three chance it will downgrade Mexico over the next 24 months if government debt ratios deteriorate beyond the agency's expectations.
S&P affirmed its BBB+ rating on the sovereign, noting that it expects net general government debt to hit 45% of GDP in 2016, steeply up from 28% in 2005.
"Low GDP growth will make it difficult for the government to meet its ambitious target of stabilizing and gradually reducing its debt as a share of GDP over the next three years," S&P said.
Mexico's economy contracted for the first time in three years during the second quarter, as the oil exporting country contended with a drop in crude prices and a slump in the value of the peso.
The peso weakened to around 18.51 versus the US dollar on Tuesday afternoon following the revised outlook, off from 18.05 a week ago. (Reporting by Paul Kilby; Editing by Marc Carnegie)