November 9, 2016 / 4:16 PM / 2 years ago

Mexico leads LatAm debt sell-off after Trump victory

NEW YORK, Nov 9 (IFR) - Mexican debt led the way lower Wednesday as Latin American credit markets sold off following Donald Trump’s victory in the US presidential election overnight.

The 2026 bonds issued by Mexico, the target of much of Trump’s trade and immigration rhetoric, opened about 17bp wider at a G-spread of 162bp, but was just shy of the 169bp seen last week, a banker told IFR.

It was a similar story for the 2026s issued by the country’s state owned oil company Pemex, whose spreads gapped out by about 27bp to a G-spread of 345bp - still inside the 362bp seen last Wednesday.

“Credit is contained,” the banker told IFR. “You won’t see as much movement in credit as in rates and FX, as they are more related to trade agreements like (NAFTA).”

The Mexican peso saw its biggest drop since the 1994 Tequila Crisis overnight when Trump looked set to win the race to the White House, according to Reuters.

The currency fell 10.35% in early morning trading to 20.2165 against the dollar, before recovering to 19.956.

Elsewhere in the region, credit was also weaker.

Brazil 2026s fell about 1.5 points at 109.60-110.10, while the 2026s issued by Brazilian oil company Petrobras dipped about 1.25 points to 110.50-110.00, according to a trader.

“Brazil is getting hit but it’s Mexico that is under pressure,” the trader said.

Low-beta credits like Mexico were being impacted most by rising US Treasury yields, as investors worry that Trump policies could result in a weaker dollar and higher inflation.

Still, with yields on Mexico’s local Mbono due 2026 widening about 35bp to 6.50%, some traders said they had seen some buying interest among clients for Mexican risk.

“All the requests we have had are to buy,” said Klaus Spielkamp, head of fixed-income sales at Bulltick.

“I guess people are looking at the drop in price as an opportunity as long as it isn’t panic selling.”

For now investors largely appear to be assessing how Trump policies might impact Mexico and Latin America more broadly before cutting or adding to positions.

“This could be good for growth, but the wild card is protectionism,” said Jack McIntyre, a portfolio manager for global fixed-income at Brandywine Global Investment Management.

Fitch Ratings warned on Wednesday that a Trump victory added to the economic downside risks for Mexico, noting the president elect’s earlier statements about the termination of NAFTA and the building of a wall on the US Mexican border.

“The likelihood and feasibility of pursuing these policies is unclear,” the rating agency said.

“But the advent of a Trump administration increases economic uncertainty in Mexico given its very close economic ties to the US.”

Reuters quoted the Mexican Finance Minister Jose Antonio Meade on Wednesday saying that the government would monitor the situation and could adjust fiscal and monetary policy if required. But there was no need to tap the international debt markets this year or next, he said. (Reporting by Paul Kilby; Editing by Marc Carnegie)

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