High inflation in Mexico has caused greater demand for Udibonos (local debt securities indexed to the price index), whose attractiveness could continue to increase in the coming months in view of the expectation that inflationary pressures will persist.
While the Udibonos they represent just over a fifth of the nearly $ 450 billion in outstanding Mexican government debt securities, the amount of this paper in the hands of local and foreign investors has grown in the year well above other more liquid, such as sovereign bonds.
Udibonos holdings increased 8.5 percent through August 9 to 300,850 million Udis ($ 103,204 million), while bonds grew just 2 percent, to 3.55 trillion pesos (176 thousand 900 million dollars), and Cetes -with shorter terms- rose 1 percent to 1.48 trillion pesos (73 thousand 800 million dollars ), according to official data.
“In general, investors have been preparing for more inflation,” said Ramsé Gutiérrez, co-chief investment officer at asset manager Franklin Templeton.
Mexico’s headline inflation (INPC) shot up to 6.08 percent in April, a level not seen since the end of 2017, mainly driven by the reopening of the economy after the closure of activities for the pandemic and pressures derived from effects on global supply chains.
Since then, consumer prices have yielded very little, causing severe headaches for the central bank, which it has had to raise its benchmark interest rate on two occasions, to try to mitigate its effects on the rest of the economy.
Betting on inflation
And the outlook is not very encouraging. Investors and economists estimate that inflation could continue at high levels in the coming months, due to a greater demand for goods and services as more productive activities normalize after more than a year of health contingency, although the central bank has said that the shocks are temporary.
Even so, the institution recently raised its forecasts for local inflation and delayed its expectation for convergence to the official goal of 3 percent to the first quarter of 2023, from the third quarter of 2022, anticipated previously.
Thus, Udibonos, whose prices are directly linked to the behavior of inflation, have increased their attractiveness in a market that seeks to hedge against the pressures on the INPC with the increasing returns they offer.
“Basically right now a lot of investors are playing the inflation trade,” said a broker at a local money exchange.
The highest demand for Udibonos has come from all fronts so far this year.
Until August 9, local participants, including, insurance companies and pension funds, who usually include this type of paper in their portfolios to diversify risk, raised their Udibonos holdings by approximately 7.7 percent, to 292 thousand 082 million Udis.
Similarly, residents abroad, who have been leaving the local market driven away by greater aversion to risk, have been increasing their positions in Udibonos and until the beginning of August they accumulated about 8 thousand 767 million Udis, 42.1 percent more than at the end of December 2020.
Analysts and traders believe that stocks will continue to see a sustained increase in buyers in the coming months, as long as inflation does not finish giving ground.
“If price pressures persist, short-term Udibonos will likely continue to perform favorably“, said Joaquín Barrera, head of fixed income at SURA Investment Management México.
“However, it must be taken into account that the dynamics in monetary policy could counteract the positive movement of these instruments,” he added.